What to Know when Purchasing a Vacation Home
Jul 21, 2015
Owning a vacation home sounds like a dream come true for many people. It is a guaranteed place of rest, relaxation and restoration. Who has not wished to have a house in some beautiful location they can escape to when they need a break? However, just like with any other big investestment it requires thoughtful consideration before making this important financial decision. Here are four of the most important questions you might wish to consider before making the leap and buying a vacation home:
- Where is the right place to buy? Purchasing a vacation and/or second home is like getting married. After visiting and enjoying the location as a vacationer, you are preparing to settle down and make a lengthy financial commitment. Picking your location will depend largely on how much you can afford, where you live, and whether you plan to rent your home out when you are not living in it.
- Can you afford a second home? Doing the math is always the first step for anyone considering the purchase of a second and/or vacation home. Otherwise, your vacation getaway may turn into a financial disaster. Look beyond just the sale price when calculating the real cost of owning the home. Consider factors such as financing, insurance, maintenance, and possibly association fees should you choose a place inside a condominium complex.
- Are you investing wisely? Recent National Association of Realtors data indicates an upward trend relating to the number of vacation and/or second homes bought for investment reasons. The figures show vacation homes are significantly outnumbered by investment properties. Property values always fluctuate, but choosing to invest part of your wealth into a second home is a wise decision when trying to diversify your investment portfolio.
- What effects will your second home have on your taxes? Like your first home, your vacation home will likely significantly impact your taxes come April 15. The National Association of Tax Professionals (NATP) says property taxes and mortgage interests on both your first and your second homes can be claimed under Schedule A deductions. However, to avoid problems with the IRS, home buyers should know of the difference between how the IRS taxes the first home and the second home. According to the NATP, if you rent out your second home less than 15 days per year, the home is designated as personal-use property by the IRS, and the rental fees are not subject to income. The only other deductions allowed for taxation purposes are property taxes and mortgage insurance. For more information on what to know prior to purchasing a vacation home, please continue reading here.