The summer is coming and for many families it means we get to a couple of weeks. While enjoying a beautiful setting, warm sunshine or cultural enrichment, it is easy to imagine how nice it would be to have a home that would allow you whenever you want.
But do not let your imagination run away with you. Before you get to a beach house or mountain cottage, give the same idea of buying as if you were buying your home.
The first question is whether you can afford a vacation. Have you included spending on education for your children? Is your retirement safe? Is your emergency fund solid? Do not remove the necessary things to cover the second home, no matter how big its potential as property. Even if you buy a property absolutely, you may not have access to equity for a certain amount of time.
The second home causes more costs than you could imagine. In addition to the purchase price, you will need to take into account maintenance, security or trustee, services, property taxes, equipment, travel expenses and other items. You may have to pay associations or billing fees. And if you plan to rent your property, you may have to pay for the ad and eventually for the property manager.
In addition, insurance can be a great deal. Property insurance in the second home often costs more than the primary home and may be more difficult to obtain. The more the house is empty, the higher you can expect in general. Insurers may also want you to pay more if you plan to rent a property. In areas where floods or hurricanes are possible, flood insurance must usually be added separately.
When considering how you finance a house, remember that second mortgages are usually more expensive than primary mortgages, because banks tend to believe more risks. Loan providers may look more at the applicant's income than on general property, which can be tightened for retirees or people approaching retirement. Some buyers are considering borrowing on their own housing on their primary housing to finance second homes, but it gives your primary home in jeopardy.
When deciding whether a holiday home is a practical purchase, estimate all these costs to get an idea of the cost of the property. If you plan to keep your property mainly for your personal use, divide the cost by the number of days you plan to visit to find out whether a home loan or a hotel stay can be cheaper
Some people consider a cash vehicle in a holiday home decide to use it for personal pleasure and generate income. However, counting rental income to net profit after costs may not always be realistic. In a high-demand environment such as a ski resort or a desirable beach, your chances are somewhat better, especially if your property is within a three-hour drive of a large metropolitan area. But the fact remains that while 25 percent of homes with holiday homes say they plan to rent their second homes, only 15 percent do. Those who do so profitably form an even smaller group.
Perhaps the most important financial consideration is the tax consequences of second housing. The primary factor that affects your personal tax situation in a holiday home is the assumed use of the property. Will your second home only be used by you, your friends and your family? Is it practical to rent it to others looking for holiday? Special tax rules for renting your holiday home can help in deciding.
First, you need to find out whether your holiday home is considered as housing or rental property. The Internal Tax Service considers your second home as a home if you personally use it for 14 days a year or more than 10% of the number of days the house is rented, whichever is the higher. Your use, use, or use of a relativeship that is leased at less than a fair price is considered as "personal use" when determining the nature of the property.
If your holiday home is considered to be a home, some deductible rental costs may be limited. Renting a property that the IRS considers to be a home is not considered a "passive activity" for income tax purposes. It depends on the fact that the loss resulting from one passive activity can be used to offset the income earned by another. Because renting a second residence is not a passive activity, you can not use any rental costs that would exceed rental income to offset income from other sources.
If the IRS considers your holiday home to be the place of residence and you have at least rented your residence for 15 days in a given year, you must distinguish between the use of rent and private use. All rental income should be reported in your gross income, in addition to the exact distribution of costs between personal and rent. Some expenses, such as mortgage interest and property tax, are usually fully deductible regardless of how they are characterized but are reported in different ways – to offset rental income in terms of rental or partial deductions, if they are personal.
Other expenses, including maintenance, insurance, depreciation and other costs associated with renting your holiday home, are used only to offset rental income if it can be classified as rental expenses. (For a full list of deductible expense, see IRS 527 "Residential Property Leases.") The allocation to the use of the property determines the amount of your expenses used to offset rental income. If you are renting half a year, half of your expenses may be deducted from rental income. Due to the complications of this division, it is probably wise to involve a tax expert if you intend to use your assets for both personal and significant rental activities.
If you do not want the costs associated with spending and constantly looking for the tenant, consider taking advantage of the preferential tax treatment offered by IRS for short-term rentals. The IRS allows you to rent a holiday home in less than 15 days a year without reporting rental income in your entire retirement, ie without tax. Of course, you can not deduct any expenses associated with renting home because there are no rental income that would be offset. In this scenario, you would indicate all your mortgage interest and property tax deductions on plan A.
If your second home is primarily for personal use, be aware of the rules of residence in the states where your two houses are located, unless they are the same. Restoring your stay can be useful, but it is sometimes challenging. For example, New York is renowned for finding ways to keep its former residents on tax records. Former New Yorker may want to take advantage of a more favorable tax climate in Florida, but it's not just a question of whether it's a good idea.
While temporary use of real estate may look like a better idea on paper than buying a holiday, the reality is inappropriate for most people. In a limited time, you will pay a lump sum for front and maintenance fees. Atraditional timeshare then warrants the use of a particular unit at the same time every year (usually for a week, although it differs). Some new timeshares work on a point system that gives users more flexibility when and where they are vacationing, but also leads to the best units at the most demanded time.
Although timeshare is cheaper at the beginning than buying a holiday home, it does not offer the same potential or capital. In fact, simply pay for the summer holidays in advance, do not invest. In addition, maintenance fees may increase and most timeshares do not have a built-in expiration date. Since a real estate with a time-limited use of real estate is notoriously difficult to sell, you (and eventually the heirs) may have to pay unlimited property charges that you no longer use. You would probably better allocate part of your portfolio to your annual holiday rather than buying timeshare. This would allow you to appreciate your assets and avoid the risk of locking into the deal without a simple departure.
If you decide to buy a holiday home, there are a few considerations. Location is vital. Select the region you want to be often – once a year or more – and possibly excluding other trips, depending on your time and resources. Rural areas may sometimes increase spending; For example, insurance can be more expensive if you are away from the nearest fire station. In addition, many desirable holiday properties are exposed to increased flood or earthquake risk, which increases potential insurance costs. If your desired property is abroad, read the laws of ownership of the country and its history that it honors property claims from non-nationals.
Finally, think about the opportunity to sell your holiday home one day. Once your use of the property is rejected, it is likely that it will be better to sell it in order to eliminate the cost of charging and the exemption of capital for other purposes. You can use the house less than you expected, or you could use it very much when your children were younger, but now less they have become adults. Regardless, it is important for the process to take place as soon as you know you want to sell. The housing market is still fairly weak, so the property's delay may take longer than you expect.
If you rent your holiday home so much so that it can be characterized as renting a property, you will want to recover the cost of a home property through depreciation. The cost of residential rental property under the General Depreciation Scheme (GDS) is 27.5 years. These capitalized expenses can be used to offset rental income, thereby lowering the tax charge. Deducting depreciation may cause a net loss on rental property. However, since your second home qualifies as a rental property and not as a residence, you can reduce other income from passive loss activities. Keep in mind that if you visit home on vacation, you can only deduct depreciation on the rental days.
When it comes time to sell your holiday home, note that the IRS will handle selling differently from your home. Your holiday home does not take exclusion from capital gains of $ 250,000 ($ 500,000 if the marriage is filed together) that your home is doing. If you have owned a property for at least 12 months, any sales proceeds will be taxed on the basis of the long-term capital returns.
In addition, if you have claimed a depreciation for housing due to rent, you will need to check your cost base for determining the profit. Even if you have not exercised the right to deduct depreciation, you still have to reduce the cost of housing to the amount of depreciation you could have made. Part of the gain on sale due to a decrease in your base is considered as a write-off and will be taxed at 25 percent.
Loss of loss scenario arises when selling a holiday home; you will not receive any of the above exclusions from your capital gains, nor will you get any tax benefits if you realize the loss of sales. For this reason, consider turning your home into a holiday home prior to sale. If you create your second home two years before your sale, you will be eligible for the maximum exclusion from capital returns.
If you want to keep a holiday home in the family and not sell it, it can cause some complications of real estate planning. It does not matter how well your children behave together, ownership of property can lead to disagreements and feelings of harm because it can give a child home and another child an advantage with less sentimental value. Even if your children share without problems, they can leave them to the children, which leads to the division of property between eight or twelve cousins who may or may not be very well oriented. Those who want to own a property may not be able to buy those who want to sell. Overall, this can lead to a drama that you do not have to anticipate.
If home sales are too painful or impractical during your life, you can drive your property to sell it and divide the yield among your heirs. Alternatively, you can build confidence in the running costs of your property and then, under certain conditions, give your heirs the use of the property. Whatever you do, do your desires explicitly, both in your will and by discussing them with your children or your heirs. Ideally, involve a financial planner or legal counsel.
A holiday home can be a wonderful luxury that will provide you with a place to get away from your everyday life and build valuable memories of friends and family. If you think it's more like buying than investing, you can make informed choices about what's right for you. Then, if you buy a holiday home, you can come close to it with realistic expectations and a good chance to enjoy it in the coming years.
Source by Thomas E. Walsh