As the mercury starts to climb, daydreams inevitably start to turn toward escaping to Arizona’s higher elevations or the cool ocean breezes of the coast. If you’ve graduated beyond camping or racked up enough hotel nights – or if you’re eyeing a more moderate climate or rural area for retirement – it can be tempting to consider investing in a vacation home of your own.
If so, you’re not alone. According to the recently released 2014 NAR Investment and Vacation Home Buyers Survey, vacation homes represented 13% of all residential sales last year, well up from the market bottom of 9% in 2009. As demand rose, so did prices: The median purchase was $168,700, nearly $19,000 higher than in 2013. (On the other hand, distressed properties – either foreclosures or short sales – were 42% of the purchases, so there are clearly still bargains to be had.) Interestingly enough, the average distance from buyers’ primary residences was 180 miles – almost exactly the distance from Phoenix to the popular destination of Pinetop- Lakeside.
Where Daydreams Meet Reality
The attractions of a vacation home are obvious: a home away from home, furnished with your own gear, customized the way you like and no need to pack large amounts of clothing or food when you want to escape for a few days or weeks. If you’re a sports enthusiast, it can put you closer to the slopes, lakes and woods. That said, there are a number of important practical and financial considerations you need to address before making the leap.
Climate: Even if you’re a transplant from a colder climate, you may have forgotten some of the downsides of true winters, such as frozen or broken pipes and the damage that snow and ice can cause. Winterization can be expensive, but can offer peace of mind; in any case, you’ll want to have shutdown procedures in place. In addition, the thinner air in higher altitudes means more UV damage to wood and painted surfaces, so plan on a thorough inspection before you buy and additional maintenance costs afterward.
Expenses: Having a second home likely means having two of everything in your life – from can openers and scissors to TVs and sound systems – which can add up. You’ll also have two sets of utility bills and property tax bills. Outside of a gated community or in an area with a large percentage of full-time residents, your home is likely to be unwatched for significant stretches of time, so it may require a security system if you have valuables.
Mortgages: Unless you’re one of the 38% of vacation home buyers who purchases with cash, you’re going to be adding a loan to your existing debt load. Obviously, the mortgage company will help you understand how much home you can afford with the additional reserve requirements. The good news is that interest on your second mortgage will be 100% tax deductible, with two caveats: 1) as long as you’re using it exclusively for a second home that’s rented fewer than 14 days a year, and 2) as long as you don’t exceed $1.1 million of debt between your primary and secondary homes.
Tax Implications: Beyond the mortgage, one of the key considerations is how the house is used, and what happens when it comes time to sell. The government allows you to earn tax-free income if you rent the home for two weeks or less, but anything more than that and it’s considered an investment property – and may also be a violation of your mortgage agreement. The rules for selling are somewhat complicated as well. If you only use it as a vacation home, the sale will be subject to a capital gains tax. The other option is to make it your primary residence for two years to take advantage of the primary-home sales exclusion ($250,000 for individuals, $500,000 if you’re married or filing jointly). Consult the IRS, a CPA or real estate expert for details on your specific situation.
The Bottom Line: Don’t be afraid to make your vacation home a reality, but be realistic about putting down a list of pros, cons and additional expenses that need to be considered. It can be an excellent investment, a way to enjoy time with your spouse and kids, and even an eventual retirement destination. Nonetheless, discussions with a knowledgeable real estate agent and accountant are paramount to understand the big financial picture.
Beth Jo Zeitzer, Esq., is the owner and designated broker of R.O.I Properties, a full-service real estate brokerage firm focused on working with business owners, investors and property owners regarding the marketing and sale of commercial and residential properties, including retail, office, industrial, multifamily, hospitality and land assets. Beth Jo can be reached at 602-319-1326 or [email protected].
