Weighing the Costs of Property Taxes When Buying a Vacation Home

Weighing the Costs of Property Taxes When Buying a Vacation Home

  • Kris Hazard
  • 09/20/22

There are a host of reasons for purchasing a vacation home, from providing you and your family a place of genuine respite to increasing your equity in a gorgeous location. Indeed, it has become an attractive option for homeowners seeking solace away from their primary place of residence: In 2021, the vacation home market soared 57.2% above the preceding year.

As alluring of a thought as it may be, it is also a significant decision—particularly when you take into account the price of property taxes. Read on for Kris Hazard’s guide to property taxes for your vacation home, whether you’re looking into investing in Kailua-Kona beach homes or North Kona real estate.

Property taxes differ between states

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If you are thinking about investing in a second home, you are likely well aware of what property taxes cover, from upkeep within the community to services such as the fire department and public education. Property taxes are a large part of how our country works. In 2019 alone, state and local property taxes brought in $577 billion in revenue.

While property taxes, which are designated at the local and state level, are well-intentioned, they can be exceedingly and even prohibitively steep, particularly in coveted zip codes. New Jersey's property tax is the highest in the nation, with an average of 2.13%. Ultimately, second to one’s mortgage, property taxes are generally the largest expense homeowners have. Thankfully, Hawaii has the lowest property taxes in the country, with a current rate of 0.28%.

Taxes and vacation homes

Regardless of the location of the vacation home you purchase, you may be able to reap the rewards of a mortgage interest deduction, which will reduce your taxable income. However, this is an issue to handle with your tax expert.

Other tax deductions are also available when you take out a mortgage for a vacation home; for instance, keeping a boat at your vacation Keauhou beach home may be used as a deductible. This, too, is an issue to discuss with your tax professional.

Weighing the cost of property taxes when buying a vacation home is not the only aspect to consider, though.

Additional expenses and factors to consider: The pros and cons

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If you have been giving the idea of buying a vacation home a great deal of thought, you have probably settled on—or are eyeing—areas you frequent and admire. With this line of logic, it would make sense to purchase a vacation home in a location you often visit rather than doling out money for a hotel, resort, or vacation rental each time you visit.

At the same time, it is important to be realistic. You may be fond of those Magic Sands condos you and your family rent when you are on the Big Island of Hawaii, for instance, but if you purchase one, will spending two to four weeks in it offset the cost of its mortgage and property taxes? Will you be working remotely and have more time to enjoy it? If you are retired, you may be able to spend ample time in your vacation home, but, as you can see, it’s wise to peer at the investment from an objective perspective.

Down payment

First, purchasing a vacation home will require a substantial down payment—approximately 5 to 20%. For the most exclusive properties on the Kailua-Kona real estate market, this can be a significant amount, so be sure that your financials are in line first.

Renting it out

Another option is to rent out your vacation home to help with the mortgage, property taxes, and additional expenses. However, the highest prices you could conceivably charge will probably be in high season—which might very well overlap with the only time you can take your vacation days.

Further, rental income is only tax-free when the property is rented out for 14 days or fewer. The short-term vacation rental market is also ultra-competitive, especially in highly sought-after places like Hawaii. It has renowned beach communities that are popular with tourists and mountain towns that lure in the ski and snowboarding crowds.

The right timing

Additionally, you may choose to purchase a vacation home that draws visitors only during certain seasons. If this is the case, then your ability to make money on it is limited. (Quick tip: Speak with your realtor about the location’s rental history to get a better grip on the amount of passive income you could potentially earn.)

That said, you may qualify for the chance to deduct home improvements on your vacation home. The caveat here is that you must show that you have used the home for 14 days or less.

Additional expenses

In addition to the property taxes you will be required to pay for your vacation home, you will also have to keep in mind other expenses, including utilities, insurance, landscaping, cleaning and other maintenance, homeowners association fees (if applicable), and, if you choose to rent it, perhaps a property manager, who may ask for a commission on rentals as high as 30%.

On the other hand, your investment in a vacation home might translate to a future windfall. This may be especially true if the real estate is in a growing and desirable area, thereby giving you the option to sell it down the line at a considerable profit. You might also choose to one day make your vacation home your main residence, especially if your love for the home and area expands with each holiday.

Final–and vital–questions to ask

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With all of this said, conduct your research. Ensure you know the cost of property taxes in the places you are considering, and examine the numbers accordingly.

Then, consider the factors that have absolutely nothing to do with numbers—and everything to do with life itself. Will owning a vacation home in North Kona real estate ensure you actually take a vacation and receive the R & R you need? Will it foster a closer relationship with you and your family? Will it enhance your health and happiness? These are questions only you can answer—and if yes to any or all of the above, investing in a vacation home may be well worth the price of property taxes and other expenses.

Explore your ideal vacation home 

Whether you’re looking to invest in Holualoa real estate for your getaway abode or are eyeing Kailua Village homes, Kris Hazard is here to assist with your search and ultimate decision. With 20 years of experience handling successful real estate transactions in Hawaii, Kris brings the island’s characteristic “aloha” spirit to all of her dealings while also ensuring she secures the best deal for her clients. Reach out to her today to get the ball rolling.

*Header photo courtesy of Shutterstock



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