Acquiring a vacation home
Acquiring a vacation home: Acquiring a vacation home. Many people of means expand their real estate holdings by acquiring a vacation home. A home for enjoying pleasure trips.
Acquiring a vacation home
Many people of means expand their real estate holdings by acquiring a vacation home. A home in an area where they enjoy taking pleasure trips.
For most people, buying a vacation home is more of a consumption decision than it is an investment decision. That’s not to say that you can’t make a profit from owning a second home. However, potential investment returns
shouldn’t be the main reason you buy a second home.
For example, we know a family that lived in Pennsylvania and didn’t particularly like the hot and humid summer weather. They enjoyed taking trips and staying in various spots in northern New England and eventually bought a
small home in New Hampshire. Their situation highlights the pros and cons that many people face with vacation or second homes.
For most people, buying a vacation home is more of a consumption decision than it is an investment decision. That’s not to say that you can’t make a profit from owning a second home. However, potential investment returns
shouldn’t be the main reason you buy a second home.
For example, we know a family that lived in Pennsylvania and didn’t particularly like the hot and humid summer weather. They enjoyed taking trips and staying in various spots in northern New England and eventually bought a
small home in New Hampshire. Their situation highlights the pros and cons that many people face with vacation or second homes.
The obvious advantage this family enjoyed in having a vacation home is that they no longer had the hassle of securing accommodations when they wanted to enjoy some downtime. Also, after they arrived at their home away from home, they were, well, home! Things were just as they expected with no surprises unless squirrels had taken up residence on their porch.
The downsides to vacation homes can be numerous, as our Pennsylvania friends found, including:
Acquiring a vacation home
Expenses: With a second home, you have the range of nearly all of the costs of a primary home mortgage interest, property taxes, insurance, maintenance, utilities, and so on.
Property management: When you’re not at your vacation home, things can go wrong. A pipe can burst, for example, and the mess may not be found for days or weeks. Unless the property is close to a kind person
willing to keep an eye on it for you, you may incur the additional expense of paying a property manager to watch the property for you.
willing to keep an eye on it for you, you may incur the additional expense of paying a property manager to watch the property for you.
Lack of rental income: Most people don’t rent out their vacation homes, thus negating the investment property income stream that contributes to the returns real estate investors enjoy. If your second home is in a vacation area where you have access to plenty of short term renters, you or your designated property manager can rent out
the property. However, this entails all of the headaches and hassles of having many short-term renters. (But you do gain the tax advantages of depreciation and all expenses as with other rental properties.)
the property. However, this entails all of the headaches and hassles of having many short-term renters. (But you do gain the tax advantages of depreciation and all expenses as with other rental properties.)
Obligation to use: Some second homeowners we know complain about feeling forced to use their vacation homes. Oftentimes in marriages, one spouse likes the vacation home much more than the other spouse (or one spouse enjoys working on the second home rather than enjoying the home itself).
Before we close out this section on vacation homes, we want to share a few tax tips, as found in the current tax code:
If you retain your vacation home or secondary home as personal property, forgoing the large income streams and tax write-offs for depreciation and operating expenses associated with rental properties, you can still make a nice little chunk of tax-free cash on the side.
The current tax code permits you to rent the property for up to 14 days a year and that income is tax-free! You don’t have to claim it. Yes, you read that right. And you can still deduct the costs of ownership, including mortgage interest
and property taxes, as you do for all other personal properties.
and property taxes, as you do for all other personal properties.
If you decide to maintain the property as a rental (you rent it out for more than 14 days a year), you, as the property owner, can still use the rental property as a vacation home for up to 14 days a year, or a maximum of 10 percent of the days gainfully rented, whichever is greater, and the property still qualifies as a rental. Also, all days spent cleaning or repairing the rental home don’t count as personal use days so that’s why you paint for a couple of hours every afternoon and spend the morning fishing!
Before you buy a second home, weigh all the pros and cons. If you have a spouse or partner with whom you’re buying the property, have a candid discussion.
Also, consult with your tax advisor for other tax-saving strategies for your second home or vacation home.
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