Summer has arrived, and for many families this means staying away for a few weeks. While enjoying the beautiful ocean, warm sun or cultural enrichment, it is easy to imagine how beautiful it would be to have a home that allows you to do it whenever you want.
But don't let your imagination run away with you. Before you pick up a beach house or mountain cabin, think about the buying process as you would to buy your primary home.
The first question is whether you can buy a vacation home. Do you cover educational expenses for your children? Is Your Retirement Safe? Is your emergency fund strong? Don't strip yourself of the necessities of covering the second home, no matter how big it is as an asset. Even if you buy the property completely, you may not be able to access the shares for some time.
The second house involves more than you can imagine. Beyond the purchase price, you will need to consider maintenance, security or guard, utilities, property taxes, furniture, travel costs and other items. You may also need to pay a subscription or evaluation fee. And if you intend to rent your property, you will likely need to pay for the ad, perhaps for the property manager.
Moreover, insurance can be a major expense. Property insurance for a second home is often more than the costs of the primary residence, and may be difficult to obtain. The more vacant the home, the more insurance premiums you expect. Insurance companies may also want to pay more if you plan to rent the property. In areas where floods or hurricanes are possible, flood insurance must be added separately.
When considering the way your home will be funded, remember that second mortgages are usually more expensive than primary mortgages, as banks tend to think that they assume more risk. Lenders may look at the applicant's income, rather than the general assets, which may make approval more difficult for retirees or those close to retirement. Some buyers are considering taking home equity loans on their primary homes to finance second homes, but this puts your primary home at risk.
When determining if a vacation home is a purchase, estimate all of these expenses to get an idea of the property's book costs. If you plan to maintain the property primarily for your personal use, you should divide the costs by the number of days you plan to visit, so you can know whether renting a home or staying in a hotel may be financially sound.
Some people consider the holiday home a profitable method or choose to use it for personal pleasure and income generation. However, reliance on rental income for net profit after expenses may not always be realistic. In places where demand is high, such as a ski resort or a desirable beach, your chance is slightly better, especially if your property is three hours away by car or close to a major urban center. But the fact remains that while 25 percent of vacation owners say they intend to rent their second home, only 15 percent do so. Those who profitably do this form a smaller group.
Perhaps the most important financial consideration is the tax implications of the second home. The main factor affecting your personal tax situation in a vacation home is the expected use of the property. Will your second home be used only by you, your friends, and your family? Is it practical to rent it to others looking for a vacation location? Specific tax rules for renting your vacation home may help guide this decision.
You must first determine if your vacation home is a residence or a rental property. The Internal Revenue Authority considers your second home a residence if you use it personally for 14 days a year or more than 10 percent of the number of days you rent a home, whichever is more. Your use, use of a relative, or use by an unrelated party who rents at a price lower than a fair price is all considered “personal use” in determining the nature of the property.
If your holiday home is considered a residence, some deductible rental expenses may be limited. Renting a property that the IRS considers to be a "passive activity" for the purpose of income taxes is not considered. This is important because a loss from a negative activity can be used to offset the income gained by someone else. Since renting a second residence is not a negative activity, you cannot use any rental expenses in excess of the rental income to offset income from other sources.
If the IRS considers your vacation home a residence and you have rented the house for at least 15 days in a specific year, you must determine the difference between rent use and private use. You must report all rental income in your total income as well as accurately divide your expenses between personal use and rental use. Usually some expenses, such as mortgage interest and real estate taxes, are fully deductible regardless of how they are described, but are reported in various ways – to offset rental income if it is rental expenses or as discounts if it is personal.
Other expenses, including maintenance, insurance, depreciation and other costs associated with renting your vacation home, are used only to offset rental income when it can be classified as rental expense. (A complete list of deductible expenses can be found in the IRS Publication No. 527, “Residential Property Leasing.”) The rental use allocation determines the amount of expenses that you use to offset rental income. If you are renting the house for half of the year, half of your expenses may be deducted against the rental income. Due to the complexities of this division, it is possible that a tax officer will be involved if you intend to use the property for both large and personal rental activity.
If you do not want to bear the burden of allocating expenses and constantly searching for tenants, consider making use of the preferential tax treatment that the IRS provides for short-term rentals. The IRS allows you to rent your vacation home for less than 15 days a year without reporting any rental income in your total income, and is therefore tax-deductible. Understandably, you may not deduct any expenses related to the rental of the home, as there is no reported rental income for compensation. In this scenario, you can detail all mortgage tax discounts and discounts on Table A.
If your second home is primarily for personal use, be aware of the residence rules in states where both homes are not the same. Your residency can be beneficial, but sometimes difficult. New York, for example, is famous for finding ways to keep its former residents on tax lists. A former New Yorker resident might want to take advantage of Florida's favorite tax climate, but it's not simply about identifying it as a good idea.
While timesharing may seem like a better idea on paper than buying a vacation home, the reality makes it unattractive for most people. In timeshare, you pay a lump sum upfront and the maintenance fee after that. Timeshare Atraditional then ensures that you use a specific unit at the same time each year (usually for a week, although it varies). Some of the new timeshare operations run on the points system, which gives users more flexibility in when and where to spend, but it also leads to competition for the best units in the desired times.
Although timesharing is initially cheaper than buying a vacation home, it does not offer the same shares or potential appreciation. In fact, you simply pay for years of vacations in advance, not invest. Additionally, maintenance fees can increase, and most timeshare do not have a combined expiration date. Since it is difficult to sell timeshare, this (and possibly the heirs) may leave you paying indefinitely on a property you no longer want to use. It's best to set aside part of your portfolio for an annual vacation rather than buying a timeshare. This would allow your assets to be valued, and would avoid the risk of locking yourself in agreement with no slight exit.
If you decide to buy a vacation home, many considerations remain. The site is necessary. Choose the region you want to be often – once a year or more – and possibly exclude other travel, depending on your time and resources. Rural areas can sometimes increase expenses; for example, insurance can be more expensive if you are far from the closest fire station. In addition, many desired vacation properties are at increased risk for floods or earthquakes, which increases potential insurance costs. If the property you want is abroad, review the laws and property history of that country in respect of non-citizen property claims.
Finally, think about the possibility of selling your vacation home one day. Once your use of the property is declining, it is best to sell it to eliminate costs and release the capital for other purposes. You can use the house less than you expected, or maybe use it a lot when your kids were younger but they are getting less now that they are adults. Regardless, carrying out the process once you know you want to sell is important. The housing market is still relatively weak, so it may take longer to sell a property than you expect.
If you are renting your vacation home enough to qualify it as a rental property, you will need to recover the cost of the home through consumption. The cost of recovering residential property leased under the Public Consumption System (GDS) extends to 27.5 years. These capitalized expenditures can be used to offset rental income, thereby reducing the tax bill. A depreciation deduction may cause a net loss on your rental property; however, since your second home is eligible as a rental property and not as a residence, you can reduce other income from negative activities with a loss. Remember, if you go home on vacation, you can only deduct the consumption for rental days.
When the time comes to sell your vacation home, note that the IRS will handle the sale differently from the one in your primary home. Your vacation home does not benefit from excluding the capital gains of $ 250,000 ($ 500,000 if you share common files) from which your primary residence takes advantage. If you own the property for at least 12 months, any profit from sale will be taxed at the rate of long-term capital gains.
In addition, if you require a decrease in the value of the house due to the use of the rent, you will need to redefine the cost basis to determine the profit. Even if you do not claim a deduction, you still have to reduce the home cost base by the amount of depreciation you would have taken. The portion of the gain from the sale due to the lower depreciation value is considered to be the basis for depreciation and will be taxed at 25 percent.
A loss scenario arises when selling a vacation home; you do not receive any of the capital gains exclusion mentioned above, and you do not receive any tax interest if you realize the loss of sale. For this reason, consider converting your vacation home into a primary residence before sale. If you made your second home primary for two to five years before selling, you would be eligible for the maximum exclusion of capital gains.
If you want to keep the vacation home in the family rather than selling, this may cause some complications in real estate planning. Regardless of how well your children are compatible, owning a drug can lead to differences and hurt feelings, and it can also give a child and a child another assets of lower emotional value. Even if your children participate without a problem, they may leave it to their children, which divides the property between eight or 12 of their cousins who may or may not know or like each other well. Those who wish to maintain the property may not be able to purchase those who wish to sell. All in all, it can create drama that you might not expect.
In the event that selling a home is painful or impractical during your life, you can direct your property to sell it and split the returns between your heirs. Alternately, you can create a trust fund to cover the operating expenses of the property, then grant your heirs use it in certain circumstances. Whatever you do, make your wishes clear, whether in your will or by discussing it with your children or your heirs. Ideally, involve a financial planner or real estate planning attorney. Put everything in writing.
The holiday home can be a wonderful luxury, providing a place to get away from your daily life and build cherished memories with friends and family. As long as you think of it as a purchase rather than an investment, you can make an informed decision about what is right for you. Then, if you buy a vacation home, you can handle it with realistic expectations and a good opportunity to enjoy it for years to come.