A second residence refers to owning or renting property in a different location from your primary home. It can be a second house, such as a vacation property, or an investment property that helps you achieve residency or citizenship in another country. The growing interest in second residences is driven by reasons like experiencing a new culture, enhancing lifestyle, maintaining sufficient income, and accessing potential tax benefits. A second residence can also serve as a valuable asset for financial stability, with opportunities to reduce expenses related to maintaining the property.
This guide will explain the difference between a second home and an investment property and how buying a second residence abroad can help you obtain residency or citizenship. We will also discuss the benefits, such as rental income, and key factors to consider, including maintenance costs, lending requirements, and long-term responsibilities.
Here is what to expect:
- What are second residences?
- Second Homes vs Investment Properties
- Tax Implications of Owning an Investment Property or Second Home
- Five Factors to Consider When Buying a Second Home or Investment Property
- Reasons to Purchase a Second Home
- Permanent Residence vs Temporary residence
- Residency by investment
- Resident vs Tax Resident
- How to Obtain a Second Residence
- Advantages of Second Residence
- Second Residence Misunderstandings
What are second residences?
A second residence refers to owning or renting a property that serves as a place to live outside of your primary residence. This can include a second home purchased for personal use or to generate rental income. In migration contexts, a second residence also refers to obtaining legal residency status in a country other than where you primarily live or hold citizenship.
There are a few common reasons people seek a second residence: it could be for investment opportunities, retirement plans, lifestyle improvement, or business expansion. Purchasing a second home or investment property can also be a practical step towards achieving legal residency or even citizenship in some countries. These properties often serve as a physical link to the host country while offering financial benefits and international mobility.
Second Homes vs Investment Properties
A second home is a type of residential real estate purchased primarily for personal use, such as vacations or seasonal stays. It typically isn’t rented out for profit. It is financed through a second home mortgage, which often offers lower interest rates and lenient terms since lenders view it as a lower-risk property.
In contrast, an investment property, often referred to as an investment home, is acquired to generate income, usually through rental properties or resale. Financing for investment homes usually comes with higher interest rates and stricter loan requirements due to their higher risk in the housing market.
While second homes are often located in desirable areas for leisure, investment properties are selected for their income potential or market value appreciation. Both play significant roles in the residential real estate sector, but their purposes and financial implications differ.
Key differences between a second home and an investment property
Aspect | Second Home | Investment Property |
Purpose | Used primarily for personal use, such as vacations or seasonal stays. | Purchased with the intent to generate income, either through rent or resale. |
Occupancy | Occupied by the owner for a significant portion of the year. | Typically rented out to tenants or used as part of a business venture. |
Financing Requirements | Often requires the owner to live there for a portion of the year; lower interest rates may apply. | Stricter lending requirements with higher down payments and interest rates due to higher risk. |
Tax Treatment | Mortgage interest and property taxes may be deductible if used personally without rental income. | Tax benefits include deductions for operating expenses, depreciation, and interest, but rental income is taxable. |
Insurance | Insurance premiums are similar to primary residences but slightly higher due to occasional use. | Higher insurance costs due to risks associated with renting to tenants or commercial use. |
Legal Requirements | Few restrictions; treated similarly to a primary residence. | Subject to additional regulations, including landlord-tenant laws and zoning ordinances. |
Profitability | Not usually purchased for profit; appreciation in value is secondary. | Expected to provide a steady income stream or capital gains on resale. |
Maintenance | Typically managed by the owner, with occasional professional help for upkeep. | Professional property management is often required to handle tenants and property issues. |
Tax Implications of Owning an Investment Property or Second Home
The tax implications of owning an investment property or second home can vary depending on the property’s location and purpose. For U.S. citizens, there are additional tax rules to consider, especially when properties are rented or located abroad.
Here’s a breakdown of the general and U.S.-specific tax considerations:
- Rental Income Tax: Income earned from renting the property is taxable and must be reported.
- Mortgage interest deduction: You can deduct mortgage interest, but limits are different depending on whether the property is for personal use or investment.
- Property taxes: Property taxes are deductible, though caps may apply in some cases.
- Depreciation: Investment properties can be depreciated annually to reduce taxable income.
- Capital Gains Tax: When selling the property, taxes may be owed on profits unless exclusions apply for primary residences.
- Tax-deductible expenses: For rental properties, expenses like maintenance, insurance, and repairs can often be deducted.
U.S.-Specific tax rules for property owners
- State Taxes: In addition to federal taxes, U.S. property owners may owe state and local taxes on rental income and property value.
- Vacation home rules: If a property is rented out and personally used for more than 14 days or 10% of the days it’s rented, it’s classified as a personal residence, impacting deductions.
- Foreign income reporting: U.S. citizens owning properties abroad must report rental income and adhere to Foreign Bank Account Reporting (FBAR) rules if accounts exceed $10,000.
- 1031 Exchange: U.S. property owners can defer capital gains taxes by reinvesting proceeds into a similar property under this rule.
- Mortgage deduction limits: Interest on mortgages is deductible only for up to $750,000 of combined debt across all properties.
Five Factors to Consider When Buying a Second Home or Investment Property
When buying a second home or investment property, here are five key factors to consider:
Purpose of purchase
Determine whether the property will serve as a second home for personal use or as an investment property for generating rental income. This decision influences financing, tax benefits, and potential returns.
Location
Choose a location that aligns with your goals. For a second home, proximity to amenities and lifestyle needs is essential, while for an investment property, areas with high rental demand and potential for property value appreciation are crucial.
Financing options
Understand the type of loan you need. A second home mortgage often requires a lower interest rate and down payment than investment property loans. Assess your financial situation and creditworthiness carefully.
Costs and taxes
Factor in additional costs like property taxes, maintenance, insurance, and utilities. Tax implications differ for second homes and rental properties, so consult a tax advisor to maximize deductions and comply with laws.
Market trends
Analyze the housing market in the area. For investment properties, consider rental yields and vacancy rates, while for second homes, focus on the value in the long run, stability and potential resale opportunities.
Reasons to Purchase a Second Home
Vacations
Buying a second home abroad gives you a relaxing vacation spot for part of the year. It’s a great way to enjoy a favorite destination with the comforts of home.
Rental income
Investment properties can earn rental income to cover mortgages and maintenance costs. Properties in top locations may also qualify for better lending terms and tax deductions.
Investments
Investing in rental or second homes can offer long-term returns through capital appreciation, especially in high-growth locations. This can help achieve financial goals faster and assist in managing mortgage debts on other properties.
Diversification of assets
A second home or investment property diversifies your portfolio and offers stability by reducing risk. It helps protect your finances from economic downturns in one country while providing potential for growth.
Tax benefits
Owning a second home or investment property can bring tax benefits like deductions for mortgage interest, property taxes, and rental-related expenses, reducing ownership costs and simplifying mortgage payments.
Citizenship and residency
Many countries also offer immigrant investor programs, like Golden Visas, that grant residency or citizenship with added benefits.
Retirement
A second home can serve as a pre-retirement vacation home, transitioning into a full-time retirement home later.
Inheritance
Having a second home offers legacy advantages by creating an asset to pass on to future generations without additional mortgage payments. Over time, its value appreciation can provide heirs with financial stability.
Permanent Residence vs Temporary residence
Getting a second residence permit can give you different benefits depending on whether it is a temporary or permanent residence permit. Both types of residence come with different rights and privileges, and the requirements to maintain them can vary.
Permanent residence allows an individual to live in a country indefinitely without a set expiration date. Permanent residents usually have the right to work, study, and access public services in the country. However, they do not have the right to vote or hold certain political offices, and they may need to meet certain requirements, like staying in the country for a specific number of years, to maintain their status.
Temporary residence, on the other hand, is for people allowed to stay in a country for a limited time, often based on specific reasons like work, study, or family ties. Temporary residents have fewer rights than permanent residents and must renew their status or leave the country once their permit expires.
Residency by investment
Residency by investment allows people to obtain residency in a country through financial investments, such as buying property or investing in local businesses. Many countries offer Golden Visa programs, granting temporary residency that can often be renewed indefinitely. Investors must keep their investment property or business active to maintain this residency. While these visas start as temporary, they can lead to permanent residency and citizenship, depending on the country’s rules.
Here is a list of common residency by investment programs and their durations.
Program | Minimum Investment | Duration | Renewable | Terms |
€300,000 | Permanent residence | Not required | Maintain the investment for five years | |
€250,000 | Renewable permanent residence | Not required | Maintain the investment indefinitely | |
€250,000 | Two years | Renewable for three years | Maintain the investment until eligible for permanent residence after five years | |
€110,000 | Renewable permanent residence | Not required | Maintain the investment indefinitely | |
€250,000 | Ten years | Renewable for as long as it is maintained. | Must live in the country for three years to qualify for permanent residency. | |
€500,000 | Two years | Renewable for three years | Maintain the investment until eligible for permanent residence after five years | |
$800,000 | Two years (conditional permanent residency) | Not required | Apply to remove conditional status after two years | |
Not applicable - Permanent residence | Not required | Not required | No investment criteria, provided investors adhere to the program's requirements | |
€250,000 | Five years | Renewable | No minimum stay is required but applicant must live in the country for five years to qualify for permanent residence. | |
Not required | Three years | Renewable | No minimum investment. Must purchase an apartment, residential building or business premisis. Permenent residence is possible after five years. |
Resident vs Tax Resident
A tax resident is someone who is considered to live in a country long enough that they are required to pay taxes there. This status is usually determined by how many days you spend in a country each year. For example, in many countries, spending over 183 days there makes you a tax resident, meaning you’re obligated to pay taxes on your worldwide income to that country.
On the other hand, residency refers to where you live or have a legal right to stay. It doesn’t necessarily mean you pay taxes there. You can be a resident of a country without being a tax resident, depending on factors like the type of visa you have, your job, or whether you own property.
Some countries offer tax programs that help investors, retirees, or residents save on their taxes. However, there are a few requirements to be met.
Here is a list of two available programs:
Program | Requirements | Tax Benefits |
Malta Global Residence Programme (GRP) | • Non-EU/EEA/Swiss nationals can apply. | • Taxable only on income earned in Malta or remitted there; capital gains from outside Malta are not taxed even if remitted. |
• Hold a Greece Golden Visa or possess a majority share of a Greek company. | • Special tax treatment for 15 years.
| |
• Individuals must have been non-residents of Spain for the past 10 years.
| • A flat 24% income tax applies to the first €600,000 of worldwide income earned, with earnings above this threshold taxed at 47%.
|
How to Obtain Second Residence
There are many ways to get a second residence, depending on your needs and goals. The best option for you will depend on your personal situation.
These options include investment programs, retirement plans abroad, or moving for new work opportunities. Understanding the different pathways available will help you make the best choice based on your specific plans and desires.
Reunification
Individuals who already hold citizenship or, in some instances, residency can petition to be reunited with their family members. This usually applies to close or immediate family members, including children, parents, spouses, and legal partners. Some countries extend the right of family reunification and second residence to siblings, grandparents, nieces, nephews, and other extended family.
Marriage
Marriage to a national is generally a qualifying criterion for a second residence permit. While it technically falls under family reunification, other countries separate the two, with an application process solely dedicated to foreigners married to citizens.
Business
Often referred to as entrepreneur or startup visas, numerous countries are willing to grant second residence permits to foreign entrepreneurs who establish new businesses or invest in existing ones. This can be anything from presenting your business plan for an innovative business with growth potential, investing a certain amount of money in existing large or small businesses, and hiring a minimum number of citizens.
Investment
Second residence by investment programs allow you to essentially buy a second residence by investing through one of the program’s pre-approved investment options. Approved investments usually include:
- Purchasing a second home or commercial property
- Bank deposits
- Purchasing government bonds
- Contributing to national development funds
Several EU countries, like Portugal, Greece, and Cyprus, offer Golden Visas allowing investors to obtain EU residency in two to six months.
Retirement
Retirement visas allow individuals to gain a second residence in another country with specific age and income requirements. For example, Panama’s Pensionado visa is available to men aged 62 and older and women aged 57 and older. Spain offers the Spain Non-Lucrative Visa, which requires proof of sufficient income without working in Spain, and then there is the Portugal D7 Visa, which also requires regular income.
Self-sufficiency
In addition to retirement visas, digital nomad visas are another way to get a second residence. This is one of the most straightforward routes targeted at remote workers. For example, the Italy Golden Visa is designed for non-EU citizens to live in the country as long as they work for companies outside Italy. The same applies to the Portugal D8 and Croatia Digital Nomad visas. These routes generally offer a renewable one-year residence permit as long as the applicant can show proof of income and employment.
Advantages of Second Residence
Expat lifestyle
Expat lifestyleOne major advantage of obtaining a second residence is that it allows you to live in a country long-term without worrying about visa restrictions. Unlike tourist visas, which often have limits and require frequent renewals, a residence permit grants you the legal right to stay. This means you can avoid the hassle of visa runs and enjoy more freedom to live or own a second home abroad.
Dual citizenship
Dual citizenshipA key benefit of acquiring second residence is that it can lead to naturalization and dual citizenship. By maintaining residence in a country for a set period, you may become eligible for citizenship. Dual citizenship grants advantages such as a second passport, allowing for greater travel freedom, visa-free access, and full rights in the country, like voting and property ownership.
Tax benefits
Tax benefitsSpending over 183 days in a country generally makes you a tax resident, changing your tax obligations. If you stay less than 183 days, you lose that status. This is beneficial for those moving to low-tax countries, as it reduces overall taxes. Some countries offer special tax regimes, granting favorable treatments or incentives for investment.
However, US citizens are taxed based on citizenship, not residency. They remain tax residents regardless of where they live. The US offers a foreign-earned income tax credit of $120,000 for citizens living abroad, which can reduce their tax liability by offsetting taxes paid to foreign governments.
Political and economic diversification
Political and economic diversificationMany look for second residences for financial optimization and diversification. Owning property abroad helps spread risk, reducing exposure to high interest rates or fluctuating rental income. A second home in a growing market can appreciate in value, offering strong returns. Additionally, second residences provide political diversification. In times of instability, having an alternative residence allows quick relocation, ensuring stability for investors and their families.
Second Residence Misunderstandings
Second citizenship
There’s a common misconception that second residences and second citizenship are interchangeable but distinct concepts. Second residence grants the right to reside in a country, while second citizenship grants full citizenship rights and a second passport.
Resident of nowhere
A common grey area in tax law created a loophole that enabled numerous travelers, especially digital nomads, to evade tax obligations by not establishing definitive tax residency. This used to be true; nonetheless, the growing trend of globalization and the expansion of temporary visa options have prompted stricter measures against tax avoidance through constant border-hopping.
Visas are not permanent residence permits.
There is often a misunderstanding of the difference between a visa and a residence permit. A visa is a document or stamp in your passport that allows temporary entry to a country for specific purposes, like tourism or work and is often limited in duration. A residence permit is a longer-term authorization that grants the right to live and sometimes work in a country for an extended period, usually longer than a visa, and may require renewal.
How Can Global Citizen Solutions Help You?
Global Citizen Solutions is a boutique migration consultancy firm with years of experience delivering bespoke residence and citizenship by investment solutions for international families. With offices worldwide and an experienced, hands-on team, we have helped hundreds of clients worldwide acquire citizenship, residence visas, or homes while diversifying their portfolios with robust investments.
We guide you from start to finish, taking you beyond your citizenship or residency by investment application.
Frequently Asked Questions about Second Residence
Can you have two primary residences?
You have the option of maintaining both a primary residence and an second residence, and either one can be considered your principal residence based on your personal choice and the duration of your stay.
What is a second residence?
A second residence is possessing the right to residency in a second country through family reunification, a work permit, or investment such as owning a second home.
Why do people acquire a second residence?
People acquire a second residence for various reasons, such as investment opportunities, tax benefits, and lifestyle enhancement. Some seek a vacation home, while others may acquire property in a different country for residency or citizenship purposes. Additionally, owning a second home can provide stability, diversify assets, and offer a hedge against economic risks in one country. It also offers flexibility for retirees or those seeking a more favorable living environment.
What does country of residence mean?
Country of residence is where a person lives, works, and contributes to the local economy. It’s their official legal residence and affects tax obligations, legal rights, and access to services.
Can I use my second residences as vacation rentals?
Laws regarding vacation rentals vary by jurisdiction. Some forbid private residences from being used as vacation rentals. Others allow certain investment properties to be listed as vacation homes, depending on the location and visa restrictions.
What are the second residence drawbacks?
The drawbacks of owning a second residence include additional costs like property maintenance, taxes, and insurance. It may also tie up capital that could be invested elsewhere. Additionally, managing a second property from a distance can be challenging, especially when it comes to maintenance or rental arrangements. In some countries, owning a second home may lead to increased tax obligations or restrictions on residency. Furthermore, the property’s value can fluctuate, adding financial risk.
Can you buy a mortgaged second home in another country?
Yes, it is possible to buy a mortgaged second home in another country, but the process and requirements vary by country. Generally, foreign nationals can obtain a mortgage for a second home, but they may face stricter criteria than local buyers, including larger down payments and higher interest rates. Some countries may require proof of income or assets in their own country, while others may have specific rules for foreign buyers. It’s essential to research local mortgage laws and financial regulations before proceeding.
Can I obtain citizenship through second residency?
Purchasing a second home abroad can lead to citizenship through residency or investment programs. Some countries offer citizenship by investment programs that grant individuals citizenship in exchange for a significant investment in the country’s economy.
How does second residence differ from permanent residency?
A second residence refers to owning or renting a property in another country, without granting legal residency rights or citizenship. It offers benefits like tax advantages or the ability to spend extended time abroad. Permanent residency, however, is a legal status allowing long-term living, work, and access to local services in that country, often after fulfilling specific requirements.
