The reality is this: if buying a primary residence makes sense today, then buying a vacation home is almost a no-brainer. Here are thoughts to consider:
* Prices are still dragging along the bottom in most markets, and that is particularly true in vacation markets, such as Destin and Saint Simons. While most major metro areas have begun to see an anemic price rebound, that has not happened here, and sales are still crippled by foreclosures.
This same condition has devastated vacation markets from Ellijay to Hilton Head and from Highlands to Panama City. If you shop carefully, you’ll find you can now buy homes for as much as 50 percent less than five years ago.
* If you classify this purchase as a “secondary residence,” it will likely qualify for the same financing as a principal-residence purchase. That means a remarkably low thirty-year fixed rate loan (probably under 4 percent). This translates into surprising low monthly payments locked in (for the most part) for a long time. And that means now is the right time to get into the vacation property game.
But wait, there’s more!
* Under the so-called “Augusta Rule,” the IRS will allow you to receive rental income on your secondary residence for a maximum of 14 nights each year totally tax-free. By offering your home to guests on mega-holidays like Independence Day, you could easily offset several months of expenses completely. In this scenario, your home is still classified as your secondary residence.
* However, if you elect to offer your vacation home for rental for more than two weeks a year, a whole new world of tax benefits begins to apply.
First, almost all expenses related to your investment property become deductible against rental income. That would likely include interest, taxes, insurance, maintenance, utilities, and any repairs or housekeeping.
In addition, all “ordinary and necessary” expenses of your new rental business become deductible. These might include advertising, computing, recordkeeping, management fees, and cleaning supplies. In essence, almost anything you spend related to the property, other than principal repayment, becomes deductible.
Next, even if you employ professional management, you and your family are allowed 14 days of personal use per year. Beyond that, you jeopardize your status as an investment, so that’s a line you don’t want to cross.
But remember, as the owner of a rental property in another location, you should visit the property from time to time to inspect the interior and exterior and meet with your manager, housekeeper and lawn maintenance service.
It’s also important to observe rental and sales activity in the neighborhood and the community, to confirm that your property is up to your standards in terms of maintenance and repairs and to test safety equipment such as smoke detectors and fire extinguishers.
Such days spent working on the property do not count toward personal use, so they would not be counted in the 14 days that you can use the property personally and still deduct all expenses.
You’ll need to keep a detailed log of your “work days,” but you are free to schedule regular work visits whenever you feel they are necessary, provided your CPA agrees.
So, what happens when you sell? It is normal to expect prices to rise once a recovery is in place. That may be hard to visualize now, but it will happen.
Normally, any profit on a secondary residence is treated as a taxable capital gain. But if you have treated your second home as a rental property, it qualifies for investment status and can be sold as part of a tax-deferred exchange.
This allows you tremendous flexibility in retirement and estate planning and at the same time a great location for a family “work trip” several times a year.
With today’s prices and interest rates, such an investment could easily pay for itself now and provide a huge payoff in the future. Talk to your CPA for full details, and download my special report on VACATION HOMES at Money99.com.
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