Alabama Gulf Coast Vacation Property Classifications

Gulf Shores & Orange Beach Condo Buying 101: First Home, Second Home, and Investment Properties

When you purchase a vacation property on the Alabama Gulf coast there are 3 types of classifications generally used by your mortgage professional – First Home, Second Home, or Investment property. In this blog we will touch on all 3 types and how they are different. If you have any questions about these you should always contact your mortgage professional and tax professional first.

First Home:

This is reserved for your primary residence and where you will live the majority of the year. You usually must be in the home with a certain number of days after closing (60 days is the average).  This property has the lowest mortgage rates and the interest on this mortgage is tax deductible. Most mortgage companies today have a rule that if you plan on turning into a rental within 6 months you must disclose this to them when applying.

Second Home:

Second home mortgage rates tend to be higher than first home mortgages but lower than investment properties.  Second home mortgage interest is also tax deductible

What’s considered a ‘second home’ or ‘investment property’ can be different depending on the lender’s guidelines. Usual guidelines for a second home are that is:

1. A certain distance from your primary residence or in a vacation destination (ex. Beach or mountains)
2. It has to be available to you within 60 days post-closing

But sometimes it can also be determined by how the contract or purchase agreement is written up.  As an example:

1. If the contract contains language that the property must honor all renters for a certain period of time (more than 60 days post-closing) then many lenders will consider this an investment property and not a second home property
2. If during the inspection or appraisal it is found that a long term renter is involved then it could be considered an investment property unless the renters lease expires within 60 days post-closing.

Second homes can be rented out but you need to be aware of IRS guidelines regarding second homes rented out or second homes not rented out. Please consult your tax professional on these rules.

Investment Properties:

If your property falls into the Investment property category your mortgage rates will be higher than both primary and secondary home mortgages and may require more money down.

Property (Ad Valorem) Taxes and Homestead Exemption:

Along the Alabama coast the Baldwin county property (Ad Valorem) taxes are 10% of the appraised value on the county tax roll for non-rental properties and 20% of the appraised value for rental properties.  As of this writing a good rule of thumb to determine a rough estimate of what the property taxes might be on a property is to figure about $330 of property taxes for every $100k of purchase price for a non-rental and $660 for every $100k of purchase price for a rental property.

What classifies as a homestead exemption is a common question when purchasing property here. In Baldwin County a homestead exemption can only apply to your primary residence not your second home or investment property. There are additional homestead exemptions for people aged 65 and over or with medical disabilities. Please see the county tax assessor site for additional information: http://baldwincountyal.gov/Government/revenue/divisions/assessments/exemptions

Alabama Gulf Coast Vacation Property Classifications information provided by Mike Bates Realtor with the Jason Will Real Estate Team.