Buying a Vacation Home? What You Need To Know About Taxes and Mortgages

There are significant differences between buying a vacation home and buying a primary residence. For homeowners who want to buy a vacation home, it's important to understand these differences. Knowing what to expect can help the home buyer prepare for the experience.

What You Need to Know About Taxes

Taxes become expensive for people who own vacation homes when they try to sell the property to someone else. Selling the vacation property to another person results in capital gains tax for the seller. Generally, vacation homeowners who sell their property are taxed on the difference between the amount that is received and the tax cost of the property.

Making improvements and additions to the vacation home can help with this, however. Associated costs for these renovations can be added to the tax cost, which can in turn lower the amount paid in taxes.

Vacation Property Mortgage

Getting a mortgage for a vacation property can be complicated, depending on where you're buying the home. Home buyers who would like to purchase vacation property should be aware of the various options and how the location of the home affects the mortgage.

Obtaining a Mortgage

When buying a vacation home inside Canadian borders, home buyers can borrow from private mortgage insurance companies. Banks take many factors into consideration when trying to decide how much to lend, including the borrower's credit and assets and the marketability of the house. For example, lenders may offer a reduced mortgage for a home that is difficult to access, can only be accessed at certain times of the year or is far from the nearest water source.

Obtaining a Foreign Mortgage

Getting a mortgage for a vacation property can be complicated if the vacation property is in another country. Canadian lenders will not loan money to to a borrower unless the mortgage can be registered with a Canadian land title. Home buyers who would like to purchase a property that is in a foreign country may need to go through a bank in that country.

Some Canadian banks operate in foreign countries. Canadians who want to borrow money for a vacation home can do so by contacting the Canadian bank branch in that country.

This is easiest to do in the United States because there's a lot of overlap between banking rules in Canada and banking rules in the United States. In other foreign locations, securing a mortgage can be very difficult and expensive. As a result, many home buyers will limit their search to a vacation property in Canada or the United States.

Refinancing Option

Alternatively, Heritage Hills homeowners who have enough equity in their home can refinance their mortgage and use the extra money to purchase a vacation property. According to Canadian law, it's possible to refinance up to 80% of the value of the home. For example, a homeowner with a $400,000 home and a $200,000 mortgage can refinance up to $320,000. After using $200,000 to pay off the original mortgage, the homeowner can use the remaining $120,000 to buy a vacation property. For a home buyer who would like to purchase a property in a foreign country, this is an easy way to finance a property.

Work With A Real Estate Professional

Working with a real estate professional to buy a vacation house can help make the process easier. If you're a home buyer with questions about vacation property mortgages and taxes, contact a reputable real estate professional today.