Considerations For Vacation Homes

Before you decide to purchase a vacation home, you should consider: the associated costs, the home’s attributes, its rental potential and the income tax treatment.

Should you buy a vacation home?

A vacation home is primarily a luxury, not an investment. You should buy one to add value to your life, not to your net worth.

How much will it cost?

Here are some of the things you can expect to pay for:

  • Mortgage payment, taxes and insurance Unless you pay cash for your vacation home, you’ll have to pay a mortgage. Also, consider the property taxes as well as hazard and liability insurance.
  • Repairs, upkeep and fees — Consider maintenance costs, including major and minor repairs. If you’re buying a condominium, you’ll have to pay a monthly fee. If you decide to rent your home, you may want to hire a professional management company.
  • Furnishings, utilities and supplies — Don’t overlook the cost of furniture, utilities, traveling to and from your home and the cost of groceries (which are often higher priced in resort areas).

What to look for in a vacation home

Consider location, size, amenities and maintenance issues.

How do you insure a vacation home?

Insure against damage and loss. Most homeowners’ policies provide limited coverage for personal property at an additional residence. Consider obtaining a dwelling and fire policy.

What about renting your home?

Renting the home out when it’s not in use can offset the costs of ownership. However, if you hire a rental broker, you’ll have to pay a fee. If you decide to show it yourself, you’ll have advertising and attorney fees.

What are the income tax consequences?

If the property is for personal use only, or is rented less than 15 days per year you may deduct:

  • Property taxes
  • Qualified residence interest
  • Casualty loss deductions
  • Rental income received from such a home is not subject to tax
  • Since you don’t report the rental income generated from the home, you can’t deduct the rental expenses.

Property is rented out for 15 days or more during the year:

When you rent out your home for more than 15 days per year, and your personal use exceeds the greater of 14 days per year, the property is considered a vacation home for tax purposes:

  • All rental income is reportable
  • Rental expenses must be divided between personal use and rental use. Deductible expenses are generally limited to the amount of income generated by the property.
  • You may deduct qualified residence interest, property taxes and casualty losses.

If you use your home less often for personal purposes, your vacation home is considered strictly rental or business property:

  • Gross rental income is taxable to the extent it exceeds rental-related expenses.
  • All expenses can be deducted against the rental income received on the property. You should report these expenses on Schedule E of your federal return.
  • If the total rental expense exceeds the gross rental income, the resulting loss may be deducted from your personal income (subject to relevant limitations.)
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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