Planning on Buying a Second Home

When purchasing a second home it is important to consider if you plan to use it as a vacation getaway or for investment purposes.  You will have different needs depending on how to you plan to use the home.

Things to Consider and Buying a Second Home

Purchasing a second home can get very complicated because of the different tax implications that accompany it.  There are many aspects to consider, but a short list is as follows:

• Mortgage interest – If you use the place as a second home, rather than renting it out as a business property, interest on the mortgage is deductible just as interest on the mortgage on your first home is and you can write off 100 percent of the interest you pay on up to $1.1 million of debt secured by your first and second homes and used to acquire or improve the properties. (That's a total of $1.1 million of debt, not $1.1 million on each home)
• Property taxes – You can deduct property taxes paid on any number of homes you own
• Rental property and Tax Implications – Very different tax rules apply depending on the breakdown between personal and rental use so it is important to closely monitor these rules
  • If you rent the place out for 14 or fewer days during the year then you can pocket the rental earnings tax-free
  • If you rent the place for more than 14 days a year then you must report all rental income and deduct rental expenses

• Tax-free Profits – The rule that allows home owners to take up to $500,000 of profit tax-free applies only to a principal residence, but one can extend the break to a second home by making it the principal residence before it is sold
  • Once you live in the second-home for two years, up to $500,000 of profit can be tax free. Some retirees take advantage of this by selling their “family” home and moving to the second home for two years
    • After 2008 a portion of the gain on a subsequent sale of the home will be ineligible for the home-sale exclusion of up to $500,000, even if the seller meets the two-year ownership and use tests. The portion of the profit that’s subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit to the total time you owned it

• Financing – With the collapse of the housing markets there are many homes available but lending can still be difficult to come by, even if you do have a good credit score. Therefore, those paying with cash are in the best position, though this is of course not always possible, and due to the time value of money (TVM) not always advisable.

Getting Financial Help

As current owners of vacation and investment homes know, the days of buying a second home, using it for a few years and selling it for a huge profit are over. Make sure to consult with an advisor for investments and your accountant for tax implications.  Also, make sure to purchase the necessary insurance for your second home.  Invest wisely and work within your budget. A financial planner, real estate agent and an accountant are all excellent sources of key information to review at the time of purchase.  A qualified professional should be contacted whenever an investor needs financial help.