Row of beach vacation homes.

Row of beach vacation homes. (Shutterstock).

Duane Duggan

Duane Duggan, Realtor and Author RE/MAX of Boulder

Brrrrrr! When January hits Colorado, thoughts turn to finding warmth! A ten-degree day tends to spark daydreams of basking on the beach. Throughout the years, I’ve guided many clients toward Realtors® in their desired vacation spots. What I’ve noticed is that Coloradans often seek out sunny island or beach destinations for their getaways.

As life progresses, homeowners may have acquired personal residences and investment properties. Eventually, the idea of a permanent family retreat in a vacation setting emerges. Baby boomers, especially, have been swiftly purchasing second homes as they approach retirement.

Ensuring a blissful vacation home experience involves considering several important factors.

Goals for the home
As families ponder the idea of a vacation home, they may start asking numerous important questions. These can revolve around immediate objectives, like determining the frequency of personal use, or longer-term plans, such as establishing the property as a lasting family vacation legacy.

Here are several questions to aid in your decision-making process.

Is rental income needed to support it financially?
Even if someone pays cash for a vacation home there will still be several expenses. Those expenses include taxes, insurance, maintenance and Homeowner’s Association fees. With a mortgage on top of that, most people will need to rent it to have some income coming in, especially in the early years of ownership.  

If rent is needed, will you manage the rental or hire a professional manager?
Some owners opt to lease their properties via various online platforms. If you pursue this route, it’s crucial to investigate local municipality regulations and Homeowner Association guidelines regarding short-term rentals. Additionally, consider whether you’ll manage cleaning and linen changes personally or hire available companies for these services.

In many resort locales, professional property managers offer the option to place your property in a rental pool. This allows for remote, hands-off short-term renting. These managers can provide insights into the average annual rental duration, enabling you to select specific days for personal use. For instance, deciding whether to reserve it for yourself during holidays or maximize rental income.

Short-term rentals often entail increased expenses for management, linens, and cleaning. Nonetheless, daily rentals might yield higher income compared to long-term leases, contingent upon the number of nights rented.

Should I rent the vacation home long-term?
To secure a future vacation home, certain families have purchased a property and promptly leased it to a long-term tenant, typically for a year or more. This supports planning for a future vacation residence while leveraging the income from the long-term tenant to cover current ownership expenses. Then, after around a decade, the property might transition from a rental to a personal getaway, possibly even serving as a home in retirement.

If it is treated as an investment, are there any tax benefits or ramifications?
As with any investment, it is a good idea to discuss with your tax advisor if there are any tax issues to consider. Tax laws change! Be sure to ask how those changes might affect your vacation home purchase.  

A few questions might be:

  • Can I deduct the mortgage interest?
  • Can I take depreciation?
  • If it is an investment, is there a limit on the number of personal days I can use it for?
  • What expenses of running the property can I deduct?
  • If it’s a rental, and I want to depreciate it, what is the maximum number of days it can be used personally?
  • House trading possibilities?

Vacation homeowners will often buy a property for the possibility of using it as “currency” to trade for other places to vacation. This helps keep lodging costs down at the places you might like to vacation in. Swap homes with your friends and networks — or check out various websites that enable you to trade homes in destinations across the world.

Is financing different for a vacation home?
Most any 1- to 4-unit mortgage lender can help you finance a vacation home. They will typically qualify you under normal underwriting guidelines. However, it is usually a good idea to use a lender who is familiar with vacation properties.

Can I buy a vacation home with my IRA?
I am often asked this question: Can you purchase a home using funds from your IRA? The answer is yes, but there’s a catch—you can’t use it for personal purposes. Setting up a self-directed IRA account is necessary for this type of investment. So, why would someone choose to do this? Consider this scenario: You reside in Boulder but envision retiring in a sunny island climate. Using your IRA funds, you can acquire a condo in the islands, exclusively renting it out as an investment within your IRA. When the time comes to make it your home, you’ll need to disburse it from your IRA, address any applicable taxes, and then use it personally. However, there are numerous intricate details to ponder. It’s crucial to seek advice from a CPA experienced in IRA real estate ownership.

Can I set up a 1031 exchange for a vacation home?
Let’s say you’ve owned a Colorado rental property for years and you are ready to enjoy the equity in a beach location. The rule in a 1031 exchange is that you need to exchange one investment property for another investment property. The answer in short is, yes, you can. Again, work with your CPA to figure out the details and requirements for renting the new property, personal use, and the possibility of using it as a full-time retirement home.

How should I hold title to a vacation home?
You could hold title in the same manner as your single-family home, in your personal name as a single person, or as Joint Tenants or Tenants in Common for multiple owners. However, with a vacation home, it might be better to hold title in an LLC. If you are renting it out regularly, an LLC helps you treat it more like a business and provides some legal protection in the event of a lawsuit from a tenant. An LLC can also be set up to allow shares of the LLC to be sold or divided up amongst family members later. Professional legal and tax advice is necessary to make sure everything is arranged properly.

Exit strategy or succession planning?
The prospect of owning a vacation home can be exciting, but careful consideration is crucial when it comes to the property’s future sale or maintaining it within the family. For instance, if a couple owns a vacation home and has four children, once the couple passes away, the property instantly has four owners. As time passes and these children have their own families, just three generations later, the ownership could expand to 10 or even 20 individuals. With such a multitude of owners, differing opinions on the property’s management can arise, potentially causing it to be perceived as more of a burden than a benefit.

Investing effort and time into devising a succession plan is invaluable. Establishing an LLC, as mentioned earlier, can provide a framework with defined agreements for multiple owners. Seeking the guidance of an attorney well-versed in crafting succession plans for vacation homes is advisable. Such professionals listen to the family’s desires and objectives, devising a tailored plan that aligns with their goals.

Get a referral!
When you’re prepared to embark on your vacation home journey, your Realtor® in colder regions can connect you with an expert specializing in your desired location. This expert brings invaluable local market insights that will empower you to make well-informed decisions.

There are many details to gauge when buying a vacation property. As you examine the idea of purchasing a vacation home, I recommend that you pull together a team that includes a Realtor, mortgage loan officer, tax accountant, financial planner, property manager, insurance agent – and possibly an estate planning lawyer – to consult with.


By Duane Duggan. Duane graduated with a business degree and a major in real estate from the University of Colorado in 1978. He has been a Realtor® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 2,500 transactions over his career. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit boulderco.com.