BUYING
a second home
REAL ESTATE 101
Dreaming big?
If vacation has been so much fun that you don’t
want it to end, a second home might be for you.
Think carefully about all the issues surrounding
owning a second home, however,
howeverr , because there
FDQEHPDMRUÀQDQFLDOLP
FDQEHPDMRUÀQDQFLDOLPSOLFDWLRQV
PSOLFDWLRQV
Investment property vs
vs.
s. vacation home
The most important decision
dec cision is whether your
home will primarily be an
n investment or a true
second home. How you use
u the home throughout
WKH\HDUZLOOGHWHUPLQHKRZLWLVFODVVLÀHGE\WKH
WKH\HDUZLOOGHWHUPLQHK
RZLWLVFODVVLÀHGE\WKH
IRS. A true second home
e is one that only you and
your immediate family us
use.
se. It’s tempting to help
cover your expenses by renting out the home to
y
other vacationers while you’re
not using it, but in
the eyes of the IRS, you may have just become a
real estate investor.
investor .
T
a
ax implications
Tax
Y ou
o can’t write of
m
interest on
You
off f the mortgage
an investment property in
n the same way you do
your primary residence, and
a you must report the
rent you receive as incom
me. In certain situations,
income.
you may be able to of
fse t the rental income with
offset
deductions for interest, ta
axes, depreciation and
taxes,
home maintenance.
IR
RS is very interested in the
The catch is that the IRS
number of days you use the home for personal use
each year.
year . If you use the
e home frequently,
frequently , you can
deduct only the expenses
expense
es that are proportional with
the amount of time you rented out the home. Also,
if you rent the unit below
w market value to friends or
family members, the IRS
S might consider that to be
personal use.
As you can see
see, your tax
t situation can get
complicated in a hurry
C
hurry. . Consult
a tax adviser before
you buy,
buy , so you can be sure you understand how
the new home will affect
af fect t your bottom line at tax
time.
Financing
Financing a second home
ho
ome also can get
complicated. If you have
e an FHA
A loan on your
primary residence and took
t ook advantage of the
low down-payment
down payment option,
optio
on, prepare to cough up
more cash for a second home than you may be
expecting. Because private
priv
vate mortgage insurance
won’t cover a second ho
ome or investment property
home
property, ,
you’ll need to put down at least 20 percent.
FHA
A only insures loans
loan s on primary residences,
so your second home loan
lo
oan will have to be a
conventional loan. This means tighter lending
standards, particularly when
w
it comes to whether
you can afford
af ford the payments.
paym
ments. Lenders will look
If your second home is used only for personal
use, the mortgage interest may be fully
deductible. According to the Internal Revenue
Service, “The total amount you can treat as
home acquisition debt at any time on your
main
n home and se
ec ond home cannot be
second
mor
ion ($500,000 if mar
r ied
more e than $1 mill
million
married
filing separately).
separ a t ely).” IRS Publication
P ublica tion 936
detail. . R
Read
discusses the issue e in detail
ead the 2015
publication
irs.gov/pub/irs-pdf/p936.pdf.
publica
tion a at t irs
.g
go v/pub/irs-pdf/p936.pdff.
closely at your income vs. housing expenses on
both homes and may require
r equire strict adherence to
debt-to-income ratios. Be prepared to show that
\RXULQFRPHLVVXIÀFLHQ
\RXULQFRPHLVVXIÀFLHQWWRNHHSERWKKRPHVDÁRDW
QWWRNHHSERWKKRPHVDÁRDW W
Other considerations
s
Add up all of the costs
cost ts before putting in an offer.
of fer .
Don’t forget utilities, home
ho
ome maintenance costs and
overhead that can add up, such as furnishings and
d
decor. . Also think about t how much it will cost to
decor
travel back and forth to
o the home.
If you will rent out the
e home while you’re away,
away ,
don’t forget about prop
property
perty management fees, and
be sure to research average
av erage local occupancy rates s
so you’re prepared for periods with no revenue.
If you get in over your
you
ur head, your “dream”
vacation home could become
b
the stuff
stuf f of
nightmares.
Property Lines: At Home edition 2017 | www.dailyastorian.com | 9