Making Your Dream Vacation Home a Reality
September 1, 2014 | Home and Family
A growing number of Americans are buying vacation homes. According to the National Association of Realtors, Americans purchased more than 700,000 vacation homes in 2013—up nearly 30 percent from the year before.
Vacation homes can be a great way to get away consistently to a favorite spot. They may also be a way to earn supplemental income if you decide to rent them out while you’re not using them. If you’re in the market for a vacation home, here are some things you may want to consider:
Spend Time Picking Your Location
When buying a vacation home, the old adage “location, location, location” is just as important as with your year-round home. Steve Goddard, a broker associate and manager with Re/Max Beach Cities Realty in Manhattan Beach, California, recommends that you buy only in an area that you’re familiar with. “Always rent a home or apartment a few times before you decide to buy, and talk to a realtor who’s familiar with the area,” he says.
Enthusiastic buyers will often shop the real estate market on the Internet after they’ve returned home from their vacation, but websites won’t tell you what the neighborhood is like. “Nothing is more important than talking to someone who knows the neighborhood,” he says. “The east side of the street could be one marketplace, and the west side could be another marketplace. Looking on the Internet, you wouldn’t realize that.”
A good real estate agent can also tell you the sales trends for the past three or four years, as well as the projections for the market in the near future. Consider how home prices are trending, and check how long homes stay on the market before they sell.
Goddard, who’s been a real estate agent for 40 years, also has an interesting gut-check suggestion for picking a location: “Look at the cars parked on the street in the area. If those cars are like your car, that’s kind of your area, whether you drive a BMW or a Prius.”
Finally, consider the distance between your year-round home and your vacation home. “It’s really obvious, but people forget. The farther away from where you live, the more difficult it is to manage,” says Goddard. If you’re less than a few hours away, it’s easier to make repairs or do maintenance.
The 2014 NAR Investment and Vacation Home Buyers Survey reveals that the typical vacation home is 180 miles from the buyer’s primary residence. Surprisingly, though, 22 percent of buyers last year purchased a property that was 1,001 miles or more from home. Owners at that distance often buy in a resort with shared, maintained common spaces or hire a maintenance firm.
Should You Rent Out Your Home?
Your restful retreat can also be a source of supplemental income. While most buyers take on a second home without the expectation of renting it out, others count on rental income to offset their mortgage expenses.
If you are renting your vacation home, especially if it’s a distance from your regular home, you may want to consider hiring a rental agency. Before you hire someone, seek out other owners in the area for suggestions on a reputable rental agency. “If you go through the Internet or newspaper, you don’t know what you’re getting,” Goddard cautions. “Someone can put together a pretty good ad or website and be in business for only two weeks.”
The minimum charge for a rental agency would be 5 to 10 percent of the rent on an annual basis. If you’re renting every week, the rate could be as high as 20 percent of your rental income, according to Goddard.
Even with a reputable rental agent, understand up front that there may be some expenses related to your structure and contents. You will experience wear and tear and occasional breakage of items. “Nobody takes as good care of your furniture and dishes as you do,” says Goddard.
Still, Goddard is bullish on vacation properties. “If you can afford a second home, the way the tax structure is set up, it’s still a good investment.” He also points out the benefits of vacationing in a home versus a hotel. A family of six or eight can stay in a home with a private pool and full kitchen for a lot less than renting two hotel rooms and eating at restaurants for every meal.
The decision to rent out a vacation home and how often you rent it and use it will have different impacts on your tax situation.
1. When you don’t rent it out. According to the 2014 NAR Investment and Vacation Home Buyers Survey, the majority of vacation homebuyers invest in a vacation home for their personal use only; either they will use it enough each year that it doesn’t warrant renting or they are not interested in the responsibilities of renting. Yet many still think of it as an investment property because they anticipate the value will go up over the time they own it.
Luckily for vacation homeowners, they can deduct up to 100 percent of mortgage interest they pay on both their primary and vacation homes up to a limit of $1.1 million ($1 million in home acquisition debt and $100,000 of home equity debt). They can also deduct property taxes on both homes.
2. When you rent it out for 14 nights or less per year. Interestingly, the Internal Revenue Service still considers your vacation home for “personal use only” even if you rent it out up to 14 nights a year. You don’t have to report the rental income on your income taxes, and you can take the full second-home interest and property tax deductions.
3. When you rent it out for 15 nights or more per year. For those who rent out their vacation home for 15 days or more, the law is very complex but can still work to your financial advantage. If this is the case, you will want to speak with your tax advisor about your specific situation. You will have to report your income from renting your vacation home. But depending on how often you rent and how often you use your vacation home, the manner in which you can take deductions will vary.
Finally, when it comes time to sell a vacation property, always keep an eye on the future and your overall financial plan. Consult with your CPA or attorney well in advance of selling—as much as three or four years ahead—so you don’t over-rent or under-rent and lose some of the tax advantages available to vacation home sellers.