Are you thinking about buying a vacation home on an island getaway for you and your family to enjoy? There are quite a few factors to evaluate in order to make the vacation home buying experience a happy one. In my previous article, Part 1 of this two-part series, I discussed goals for your vacation home, rental income, and professional property management. In this article, I will outline further considerations that will help guide you toward your purchase.
Should I rent the vacation home long term?
To have a vacation home for the future, some families have bought a home and immediately leased it to a long-term tenant, say for a year or more. This is because a long-term tenant now will help pay for the current expenses of owning it. Then later down the road, say in 10 years, you can stop renting it out and use it for yourself as a vacation home, or maybe even as your retirement home.
If it is treated as an investment, are there any tax benefits or ramifications?
As with any investment, it is a good idea to discuss with your tax advisor if there are any tax issues to consider. Tax laws change! Be sure to ask how those changes might affect your vacation home purchase.
A few questions might be:
• Can I deduct the mortgage interest?
• Can I take depreciation?
• If it is an investment, is there a limit on the number of personal days I can use it for?
• What expenses of running the property can I deduct?
• If it’s a rental, and I want to depreciate it, what is the maximum number of days it can be used personally?
House trading possibilities?
Vacation homeowners will often buy a property for the possibility to use as “currency” to trade for other places to vacation. This helps keep lodging costs down at the places you might like to vacation in. Swap homes with your friends and networks — or check out various websites that enable you to trade homes in destinations across the world.
Is financing different for a vacation home?
Most any 1- to 4-unit mortgage lender can help you finance a vacation home. They will typically qualify you under normal underwriting guidelines. However, it is usually a good idea to use a lender who is familiar with vacation properties.
Can I buy a vacation home with my IRA?
I get asked this question a lot. Yes, you can buy a vacation home with funds from your IRA, but you can’t use it personally. You also need to set up a self-directed IRA account. So why would you want to do that? Let’s say you live in Boulder and eventually want to retire on a warm island. You can buy a condo in the islands with your IRA and rent it out full time as an investment for your IRA. Then when it’s time for you to move in, you need to disburse it from your IRA, pay any applicable taxes, and you can use it personally. There are many more details you need to consider here so be sure to consult with a CPA who has experience in IRA real estate ownership.
Can I set up a 1031 exchange for a vacation home?
Let’s say you’ve owned a Colorado rental property for years and you are ready to enjoy the equity in a beach location. The rule in a 1031 exchange is that you need to exchange one investment property for another investment property. The answer in short is, yes, you can. Again, work with your CPA to figure out the details and requirements for renting the new property, personal use, and the future possibility of using it as a full-time retirement home.
How should I hold the title of a vacation home?
You could hold title in the same manner as your single-family home, in your personal name as a single person, or as Joint Tenants or Tenants in Common for multiple owners. However, with a vacation home, it might be better to hold title in an LLC. If you are renting it out on a regular basis, an LLC helps you to treat it more like a business and provides some legal protection in the event of a lawsuit from a tenant. An LLC can also be set up to allow shares of the LLC to be sold or divided up amongst family members later. Professional legal and tax advice is absolutely necessary to make sure everything is arranged properly.
Exit strategy or succession planning?
The idea of having a vacation home can be very exciting, nevertheless, some planning needs to be done with regards to selling the property when the family is done with it — or figuring out how to keep the property in the family. If a couple owns a vacation home and they have 4 kids, when the couple passes away, suddenly the property has 4 owners. Those kids will have their own children and in just 3 generations there could be 10 to 20 owners. With 10 to 20 owners, you can imagine there can be many different opinions as to what to do with the property. Some of the new owners may view the ownership more as a burden than a benefit. Taking some time to create a succession plan is worth the time and effort. You might want to set up an LLC as described above so you have an agreement about how it works with multiple owners. Generally, it is a good idea to find an attorney with experience in creating succession plans for vacation homes. The attorney will listen to the family’s needs and goals and create a plan that works.
Get a referral
If you’re ready to find your vacation dream home, your Realtor® in Boulder County can refer you to another Realtor in the vacation destination you’re interested in. That expert will have local market knowledge to help you make informed decisions.
There are many details to gauge when buying a vacation property. As you examine the idea of purchasing a vacation home, I recommend that you pull together a team that includes a Realtor, mortgage loan officer, tax accountant, financial planner, property manager, insurance agent – and possibly an estate planning lawyer – to consult with.
By Duane Duggan. Duane is an award-winning Realtor® and author of the book Realtor for Life. He has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. For questions, email [email protected], call 303.441.5611 or visit boulderco.com.