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Considering a Vacation House? Consider Carefully

For Immediate Release

CONTACT: N'ann Harp (703)416-0257
[email protected]

So, your family is contemplating purchase of a vacation getaway? If your idea of a suitable second house or vacation place is something more well-appointed than a fishing shack....something that comes with indoor plumbing and a mortgage, there are questions you'd be well-advised to ask yourself first, according to N'ann Harp, president of Smart Consumer Services, a Crystal City, VA based consumer education and assistance organization.

"The pleasures and benefits of having a vacation house are considerable, if you do your homework, get good tax advice beforehand and are realistic about how you will pay for and plan to sell or use the second residence in the future," Harp says.

Here's a checklist of points to consider prior to becoming a second homeowner.

It's NOT Just An Extra Mortgage Payment

There are upkeep and repair costs, as well as condo or homeowner association fees that you will incur over and above the mortgage itself. Be certain you have conservatively estimated what your REAL costs will be prior to making the commitment to purchase. Oceanfront or harsh climate residences are subject to unpredictable weather damage. Who will keep an eye on the place while you're far away?

Brace for Higher Rates of Interest, Insurance & Taxation

Be prepared to pay higher rates of loan interest, taxes and insurance on the second home than you do on the first. Even if you rent your primary residence lenders will view your loan application for a vacation house to be a higher risk. Alternatively, consider approaching the seller for possible financing assistance. Don't be surprised to find your second home hit with increasing assessments for local schools and other community infrastructure as the popularity and population of the vacation area expands.

IRS Returns Will Become More Complex

Owners who formerly felt comfortable handling their own taxes with a single-home, often become overwhelmed at the complexity of IRS rules surrounding second home ownership. Despite tax relief provided under certain conditions by the 1997 Taxpayer Relief Act, there still are numerous opportunities for vacation homeowners to shoot themselves in the foot at tax time, especially if you intend to rent out the vacation property for part of the year.

One basic rule of thumb, however, is that if you rent out the second home fewer than 15 days during the tax year, all income derived from that rental is non-taxable. Anything beyond the 15-day mark is when it starts to get tricky. The IRS says rental income deductions are not supposed to exceed rental income. But, the IRS and the U.S. tax court do not see eye-to-eye on exactly how to calculate those deductions when a second home rental situation exists and the matter remains unresolved in all but a handful of states. Be certain to speak with your tax advisor before purchase, particularly if you expect to use rental income to cover a considerable portion of expenses.

Restrictions Abound in Condos or Homeowner Associations

You may own it but the collective makes the rules. Be certain you thoroughly understand any restrictions that may apply to your condo, homeowner association or resort development property prior to signing a purchase agreement. This could pertain to rental or swap situations equally.

Think Ahead to Resale Time

Now is not too soon to be thinking about how you will handle the vacation property when you decide it's time to sell one or another of your properties. Recent changes in the tax law have done away with the "once-in-a-lifetime" over-55 years rule about $125,000 being tax exempt at the sale of one's primary residence. There is no longer any limit on taking the exemption - as long as the house is your primary residence.

Planning ahead now for the possibility of turning the vacation house into your primary residence at some point may be beneficial and suit your long-range financial objectives. (Remember: it must be lived in as your primary residence for 2 years of the preceding 5 years prior to sale to take the exemption.) Willing the property to your children can also defer or completely eliminate capital gains taxation under certain circumstances. A so-called "like kind exchange" is also a possible alternative to sale. Discuss these ideas with your tax advisor to see which options may be best for you.

Consider Alternate Approaches to Vacation Homes

Timeshare ownership... is a special sub-set of vacation home ownership that may be worth considering. At one time the IRS attempted to force timeshare owners to pay taxes on the capital reserves maintained for upkeep purposes, but owners of timeshares successfully lobbied to protect the capital reserves of their properties from taxation. That protection became part of the Taxpayer Relief Act of 1997. For more information on timeshare ownership, visit: the American Resort Development Association.

Home swapping... is another alternative to the financial and other complexities of owning a second home. At least one organization, Intervac, has been assisting families around the world with spending vacation time in someone else's home since 1953. Tens of thousands of converts to the program suggest that it is a viable approach. For more info on home-swapping, see Intervac.

Second home purchase can be a rewarding way to spend relaxing time with family and friends. If the costs, deductions and income tax changes brought about by owning a second home are a benefit or at LEAST not a burden, the pleasures are even greater.

For more information, go to Smart Consumer Services

Fax-Back Information available: (703)416-0258

© 2002 Smart Consumer Services. All Rights Reserved.

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