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Considering a Vacation House? Consider Carefully
For Immediate Release
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?
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. 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.
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. 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.
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. (www.smartconsumerservices.org) This material is not in the public domain. Neither this material, nor any part of this material, may be reproduced, sold, re-sold, posted, directly linked, framed, traded, incorporated within other material, or given away without the express written permission of the Smart Consumer Services. |