The Benefits of Owning a Vacation Home
A vacation home is not for everyone. If you don't have the funds or income to carry the expenses of owning a vacation home, now is probably not the right time to invest in one. Remember, if you own a primary residence as well as a vacation home, you will be making two monthly mortgage payments, two property tax payments, payments on two sets of utility bills, and so on. But if you can afford the cost of owning a second home, vacation properties can provide you with a great opportunity to take advantage of the real estate boom. Perhaps more than any other property type, vacation homes offer the potential for considerable price appreciation over the long term. But there is no such thing as a free lunch.Vacation properties are expensive to purchase and expensive to maintain. In most cases, you are spending a good deal of money each month to carry the property. The payoff could be significant in the end, but the costs of getting there are not small. Vacation property ownership is not for everyone. But if you can afford to take this step, here are some of the benefits of vacation property ownership:
Tax Deductions
As I noted earlier, vacation property rented out for less than fourteen days is treated as if it were a primary residence for tax purposes, with all the tax benefits associated with home ownership.
Capital Gains Exclusion
If you sell your vacation home, it will qualify for a one-time capital gains exclusion of $250,000 ($500,000 in a joint return) if you live in it and use it as a principal residence for at least two of the five years before the sale. If you rent your vacation home, you may be able to defer tax on the sale by purchasing another investment property under a Section 1031 exchange. (See your accountant for more details.)
Building Wealth Through Amortization
Just like your primary residence, you can build wealth through the amortization of your vacation-home mortgage loan. As you pay off the principal balance on your second-home mortgage loan, you are in effect increasing your equity (wealth). Over time, you build equity in your home while paying down the outstanding loan, until you eventually own the home entirely. Amortization by itself cannot make you wealthy, but combined with price appreciation, it can increase your wealth significantly. Given the continuing real estate boom, price appreciation is perhaps the greatest financial benefit of purchasing a vacation home. It can be one of the most secure investments you can make with regard to price appreciation vis-à-vis other real estate investments. As already mentioned, vacation-home price appreciation in many areas of the nation is significantly greater than the appreciation of non-vacation-property real estate, particularly in the coastal vacation spots. Even though data is scarce, the NAR survey on second-home properties suggests that price appreciation on vacation homes has been hovering in the double-digit range for the past several years (it was 27 percent in 1999 to 2001, and anecdotal evidence suggests more of the same in 2002 to 2004).
The Happiness Factor
A second home, if considered and chosen carefully, in addition to being a sound investment, offers home owners years of enjoyment and an opportunity to get away from the often hectic environment of their everyday community and home, in a setting that is often more rural, private, and scenic, and that offers different amenities than their primary residence.
The X Factor
There is another potential savings as well. Do you keep records of expenses for some of your previous vacations- airfares, costs of rooms in hotels, resorts, condominium rentals, meals in restaurants, tips to (seemingly) virtually everybody at the places you stay and eat, and all the other big and little costs, from rental cars to taxicabs? If you do, you know how much money such vacations cost-- thousands to tens of thousands over the years. Owning a vacation home-especially if it's close enough that you don't have to fly to get to it--will save you a lot of money on travel and accommodations over the year, a factor not everyone considers.
Leveraged Investment
The investment you made in a vacation home is the cost of the down payment plus the monthly expenses. At some point during the life of the mortgage loan, your costs turn into income if you are renting the property out part time. The greater the cash flow, the greater your leveraged return on investment.
A Retirement Option
Some home owners purchase a second home with the expectation that the property will eventually become their retirement home. Such advance planning puts them way ahead of where they would be on their payments and equity investment if they waited until their retirement years to buy. Again, prices are sure to rise in the succeeding decades as 76 million baby boomers reach retirement age--especially in the hottest markets. By buying now before the first wave of baby boomers reaches retirement, you'll essentially be able to buy your future home at a discount. Bear in mind that the 1997 federal tax law changes allow couples to avoid paying capital gains taxes on profits of up to $500,000 on the sale of a primary
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