Clients might consider buying a second home for a number of reasons. These include:
- A place for family getaways: For clients who love to vacation in a location year after year, finding a second home in that area can help them avoid needing to find a place to stay and paying for a hotel or other rental each year.
- A potential spot to spend all or part of their retirement: Clients who buy a second home in their chosen retirement location can use it as a place to stay when visiting before retirement. This smoothes the relocation process when they are ready to retire — and also gives them a chance to test the waters while they are still in the workforce.
- As a rental property: Real estate can help clients diversify their investments away from more traditional stocks and bonds, bring in revenue and offer tax advantages. If a property eventually is used as a vacation or retirement home, rental income can help make acquiring this property easier financially. It's important to keep in mind that real estate is a relatively illiquid investment.
Whether your client wants to buy the home as a residence or an investment, there are questions of financing, taxes and estate planning to consider. As their financial advisor, you should walk them through these issues.
Cashflow and Costs
Beyond the purchase price of the property, second homes can incur significant maintenance, property taxes, homeowners' association fees and insurance costs.
Devin Carroll, owner and lead advisor at Carroll Advisory Group, says of buying a second home, "Like all major purchases, it must be prepared for, but an important step is also working with the buyer to set a realistic expectation of the costs of maintaining the second home: taxes, insurance, utilities, and also items, like landscaping or maintenance, that the homeowner would otherwise handle themselves, but now must hire someone else to do while they are away."
Financing and Debt
Lenders may require larger down payments for second homes, and mortgage rates may be less favorable than for primary residences.
Among the issues cited by Jeffrey Cutter, president of Cutter Financial Group, "Credit score is a big one. I find that many folks do not pay attention to their credit. This is a big mistake since interest rates and accessibility to credit can be deeply compromised. Stay committed to paying bills on time, review your credit reports at least annually."
This is especially important for clients who have a mortgage balance on their primary residence.
Carroll adds, "Retirees looking to finance their purchase, whether due to illiquid assets, tax ramifications of a large withdrawal, or a favorable interest rate environment, may find their options limited, even those with a high net worth. Lending institutions look at a buyer's income sources, and the lack of a paycheck often presents a hurdle."
Strategic Planning
Advisors can help determine if buying with cash, using a home equity line of credit on a primary residence or financing is best to maintain liquidity.
"Real estate is an appreciating asset, but it is also an illiquid asset," Carroll notes. "Before making a purchase, buyers should carefully consider whether their remaining assets are sufficient to meet their other spending goals."
Cutter offers that "the end result" frames planning around how to pay for a second home.
"There is nothing like true home ownership, one where there is no debt," he says. "However, taking out a conventional mortgage can accomplish a few things. You are leveraging yourself and using the bank's money; building your credit score; interest can be itemized if qualified. For young buyers, I suggest a 30-year mortgage, and making just one extra payment per year can cut years off the mortgage."
Tax Implications: Ownership
Taxes on a second home can be complicated.
For second homes that are not used as a rental property, property taxes are generally deductible up to the state and local tax deduction cap limit, which is $40,400 for 2026. This cap, however, includes any property taxes deducted from the client's primary residence, as well as any other state and local tax deductions. This could potentially limit or eliminate the property tax deduction available on the second home.
For mortgages taken out on a second home, the deduction works in a similar fashion. For 2026, mortgage interest can be deducted to a maximum of $750,000 ($375,000 for married filing separately). Any mortgage debt on a primary residence would count toward this limit, reducing the amount of mortgage interest from the second home that could be used as a deduction.
When selling a primary residence, married couples can exclude up to $500,000 in gains, while individuals and those married filing separately can exclude up to $250,000. This exclusion does not apply to a second home that has not been lived in as a primary residence.
Tax Implications: Rental Property
For clients intending to rent out a second home all or a portion of the time, the tax picture changes. They may be able to deduct such expenses as mortgage interest, property taxes, property insurance, utilities and other operating costs. Additionally, they will be able to depreciate the home and deduct annual depreciation expenses. The amount they will be able to deduct will depend on the percentage of time that the property is used as a rental.
On the revenue side, any rental income they receive from the property will be considered taxable and could have a large effect on their tax base.
Clients may choose to hire contractors, such as a property manager to collect rents or a professional to make repairs, and these expenses are generally deductible to help offset rental income.
Estate Planning
A second home adds a potentially high-value asset to an estate, Carroll notes.
"For those who have the means to do so, a real estate purchase can be a wonderful way to pass your legacy to the next generation as well as enjoy the gift with them," he says.
With that comes the need to work with clients on how to treat the second home as part of an estate plan. While each situation is potentially different, transferring the property to a trust or holding it in an LLC can help mitigate potential estate tax issues and allow the property to be enjoyed during their lifetime.
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