The Vacation Home Primer – 7 Key Considerations Before you Pull the Trigger

Key Takeaways:

  • Vacation HomePurchases of vacation homes have spiked over the past few years.
  • Before purchasing your getaway home, consider whether you plan on using it for yourself or for renting.
  • When considering a purchase, account for extra expenses such as insurance, taxes, utilities, furnishings and upkeep before taking the plunge.

It’s summer time. So if you’re like me, you can’t wait until the weekend (if not before) to head to the beach. As a former Mack & Manco’s employee and boardwalk lover, I’m partial to Ocean City, NJ. But whether you are a beach bum or a ski bum, if you are planning on buying a vacation home, you’re not alone.  According to the National Association of Realtors, the purchase of vacation homes jumped more than 50 percent in 2014 to almost 1.1 million homes.

Given vacation home purchases are en vogue right now, here are seven important considerations to keep in mind before pulling the trigger on your own private getaway:

  1. Use or rent? The first big decision you need to make is whether you’ll use the vacation home for yourself exclusively or whether you will rent it out for extra income.  If you plan to rent the property, consult with a CPA first since you will have income and expenses (particularly depreciation and operating expenses) that you need to account for properly.
  2. Income property. If you’d like to use and rent the property, consider renting a few days a year.  The IRS allows you to rent the home out for up to 14 days per year on an income tax-free basis!  This could be a good way to make a few extra dollars tax-free.
  3. Financing the purchase. The majority of vacation home buyers have to finance at least a portion of their second home purchases. If you do borrow money, you’ll most likely need to come up with a large down payment on the home. Depending on your credit score, a jumbo mortgage (or borrowings of greater than $417,000 for a single family home) lender typically requires you to put down anywhere from 20 percent to 30 percent of the purchase price (typically based on your credit score). And if you have an existing mortgage on your primary residence, then you’ll also have to prove that your cash flow is sufficient to carry the payments for both of your residences.
  4. Insurance and taxes. These are the often-forgotten costs of owning a home, even though they can be unbelievably expensive in prized locations. I know a family with a $1 million Jersey shore home that pays about $3,500 a year in homeowner’s insurance, almost $3,000 per year in basic and excess flood insurance, and $10,000 per year in property taxes. Things can get expensive very quickly in vacation destinations.
  5. Utilities. Depending on how often your vacation property is used, utility costs can be just as high as they are for your primary residence, if not higher! The family I mentioned earlier with the $1 million Jersey shore home has a monthly water bill at the shore that is triple their water bill at home in Pennsylvania!
  6. Furnishings and upkeep. You won’t be spending all of your time on the beach or the slopes, so you’ll have to furnish your vacation house as well as keep it up. Consider the costs of new furniture, lawn service, landscaping, etc. when doing your ownership calculations.
  7. Tax breaks. Even if the vacation home is not your primary residence, you can still deduct the mortgage interest expense up to the first $1 million in financing when you purchase.  This can sometimes ease the burden of the additional costs listed above.


Conclusion

If you are considering a vacation home purchase and would like to talk through this some more, feel free to contact me anytime.  Enjoy the rest of your summer at home or on the road!

About Patrick Runyen

As a Wealth Manager at Independence Advisors, Patrick Runyen, CPA/PFS, CFP® works closely with clients to implement wealth management solutions. He leverages his technical financial planning and consulting experience to assist clients with investment counseling, retirement planning, estate planning, wealth enhancement, asset protection, tax planning, and other personally significant financial decisions. CLICK HERE TO ASK PAT.