Should You Purchase A Vacation Home?

Summer has arrived, and for many families, that means getting away for a few weeks. While enjoying beautiful surroundings, warm sun or cultural enrichment, it’s easy to imagine how nice it would be to own a home that would let you do so whenever you wanted.

But don’t let your imagination run away with you. Before you snap up a beach house or a mountain cabin, give the same thought to the purchase as you would to buying your primary home.

The first question is whether you can afford a vacation home. Have you covered educational expenses for your children? Is your retirement secure? Is your emergency fund solid? Don’t rob yourself of essentials to cover a second home, no matter how great its potential as an asset. Even if you buy the property outright, you may not be able to access the equity for some time.

A second home entails more expense than you might imagine. Beyond the purchase price, you will need to consider maintenance, security or a caretaker, utilities, property taxes, furnishings, travel costs and other items. You may also need to pay association or assessment fees. And if you intend to rent your property, you will most likely need to pay for advertising, and possibly for a property manager.

Further, insurance can be a major expense. Property insurance for a second home often costs more than for a primary residence, and may be more difficult to obtain. The more the house will be vacant, the higher you can generally expect premiums to be. Insurers may also want you to pay more if you plan to rent the property. In areas where floods or hurricanes are possible, flood insurance generally must be added separately.

When considering how you will finance the home, remember that second mortgages are usually more expensive than primary mortgages, as banks tend to believe that they are assuming more risk. Lenders may look at an applicant’s income, rather than general assets, which can make approval harder for retirees or those approaching retirement. Some buyers consider taking home equity loans on their primary residences to fund second homes, but this puts your primary home at risk.

When deciding whether a vacation home is a practical purchase, estimate all these expenses to get an idea of the carrying costs for the property. If you plan to maintain the property mainly for your personal use, divide the costs by the number of days you plan to visit, so you can see whether renting a home or staying in a hotel might be sounder financially.

Some people do consider a vacation home a moneymaking vehicle, or choose to use it for both personal pleasure and to generate income. However, counting on rental income to net a profit after expenses may not always be realistic. In a high-demand locale, such as a ski resort or a desirable beach, your chances are slightly better, especially if your property is within a three-hour drive or so of a major metropolitan center. But the fact remains that, while 25 percent of vacation homeowners say they intend to rent their second homes, only 15 percent do so. Those who do so profitably form an even smaller group.

Perhaps the most important financial consideration is the tax implications of a second home. The primary factor affecting your personal tax situation for a vacation home is the property’s anticipated use. Will your second home be used only by you, your friends and your family? Is it practical to rent it to others seeking a vacation site? Specific tax rules for renting out your vacation home may help guide this decision.

You must first determine whether your vacation home is considered a residence or a rental property. The Internal Revenue Service considers your second home a residence if you personally use it for either 14 days a year or more than 10 percent of the number of days the home is rented out, whichever is more. Your use, a relative’s use or use by an unrelated party renting at less than fair price all count as “personal use” in determining the nature of the property.

If your vacation home is considered a residence, certain deductible rental expenses may be limited. Renting a property that the IRS considers a residence does not qualify as a “passive activity” for the purpose of income taxes. This matters because a loss incurred from one passive activity can be used to offset the income gained by another. Since renting a second residence is not a passive activity, you cannot use any rental expenses in excess of your rental income to offset income from other sources.

If the IRS considers your vacation home a residence and you rent the home out at least 15 days in a given year, you must characterize the division between rental use and private use. You must report all rental income in your gross income in addition to accurately dividing your expenses between personal use and rental use. Certain expenses, such as mortgage interest and property taxes, are usually fully deductible no matter how they are characterized, but are reported in different ways – to offset rental income if they are rental expenses or as itemized deductions if they are personal.

Other expenses, including maintenance fees, insurance, depreciation and other costs involved with renting out your vacation home are only used to offset rental income when they can be classified as rental expenses. (A complete list of deductible expenses can be found in IRS Publication 527, “Residential Rental Property.”) The allocation to rental use determines the amount of your expenses used to offset rental income. If you rent the home for half of the year, then half of your expenses may be deducted against your rental income. Given the complications of this division, it is probably wise to involve a tax professional if you intend to use your property for both personal and substantial rental activity.

If you do not want the burdens of allocating expenses and continually seeking renters, consider taking advantage of the preferential tax treatment the IRS offers for short-term rentals. The IRS permits you to rent your vacation home for fewer than 15 days annually without reporting any rental income in your total income, thus tax-free. Understandably, you may not deduct any expenses related to renting the home, as there is no reported rental income to offset. In this scenario, you would itemize all of your mortgage interest and property tax deductions on Schedule A.

If your second home will be primarily for personal use, be aware of residency rules in the states where both of your homes are located if they are not the same. Reestablishing your residency can be useful, but is sometimes challenging. New York, for example, is notorious for finding ways to keep its former residents on the tax rolls. A former New Yorker may want to take advantage of Florida’s preferable tax climate, but it isn’t simply a matter of deciding it’s a good idea.

While a timeshare may seem like a better idea on paper than buying a vacation home, the reality makes it unappealing for most people. In a timeshare, you pay a lump sum up front and maintenance fees thereafter. Atraditional timeshare then guarantees you the use of a specific unit at the same time every year (typically for a week, though it varies). Some newer timeshares operate on a points system, which gives users more flexibility in when and where they vacation, but also leads to competition for the best units at the most desirable times.

Though a timeshare is cheaper at the outset than buying a vacation home, it does not offer the same equity or appreciation potential. In effect, you are simply paying for years of vacations in advance, not investing. Additionally, maintenance fees can increase, and most timeshares don’t have a built-in expiration date. Because timeshare property is notoriously hard to sell, this can leave you (and potentially your heirs) indefinitely paying fees on a property you no longer wish to use. You would likely do better to earmark a portion of your portfolio for an annual vacation rather than to purchase a timeshare. This would allow your assets to appreciate, and would avoid the risk of locking yourself into an agreement with no simple exit.

If you decide to purchase a vacation home, several considerations remain. Location is crucial. Choose a region where you will want to be often – once a year or more – and possibly to the exclusion of other travel, depending on your time and resources. Rural areas can sometimes increase expenses; for example, insurance may be more costly if you are far from the nearest fire station. In addition, many desirable vacation properties are at increased risk for floods or earthquakes, further driving potential insurance costs up. If your desired property is abroad, review that country’s ownership laws and its history of honoring ownership claims from noncitizens.

Finally, think ahead to the possibility of selling your vacation home one day. As soon as your use of the property declines, it is probably better to sell it to eliminate the carrying costs and free the capital for other purposes. You may use the house less than you expected, or you may have used it a great deal when your children were younger but less now that they have become adults. Regardless, getting the process under way as soon as you know you want to sell is important. The housing market is still relatively weak, so it may take longer to sell the property than you expect.

If you rent your vacation home enough for it to be characterized as a rental property, you will want to recover the cost of the home through depreciation. Recovery of the cost for residential rental property under the General Depreciation System (GDS) spans 27.5 years. This capitalized expense can be used to offset rental income, thus lowering your tax bill. Deducting depreciation may cause a net loss on your rental property; however, since your second home qualifies as rental property and not as a residence, you can reduce other income from passive activities with the loss. Remember, if you visit the home on vacation, you may only deduct depreciation allocated to rental days.

When the time comes to sell your vacation home, note that the IRS will treat the sale differently from that of your primary home. Your vacation home does not benefit from the $250,000 capital gains exclusion ($500,000 if married filing jointly) that your primary residence does. If you have owned the property at least 12 months, any profit from the sale will be taxed at the long-term capital gains rate.

In addition, if you claimed depreciation on the home due to rental use, you will need to refigure your cost basis to determine the gain. Even if you did not claim the depreciation deduction, you must still reduce the cost basis of the home by the amount of depreciation you could have taken. The portion of gain on the sale due to depreciation lowering your basis is considered depreciation recapture and will be taxed at 25 percent.

A lose-lose scenario arises when selling a vacation home; you do not receive any of the capital gains exclusion mentioned above, nor do you receive any tax benefit if you realize a loss on the sale. For this reason, consider converting your vacation home to a primary residence before selling. If you make your second home your primary residence for two of the five years prior to selling, you will qualify for the maximum capital gains exclusion.

If you want to keep the vacation home in the family rather than selling, it can cause some estate-planning complications. No matter how well your children get along, co-owning a property can lead to disagreements and hurt feelings, as can giving one child the home and another child an asset with less sentimental value. Even if your children share without issue, they may leave it to their children, resulting in a property split between eight or 12 cousins who may or may not know or like one another very well. Those who wish to keep the property may not be able to buy out those who wish to sell. All in all, it can create drama you may not foresee.

In the case where selling the home is too painful or impractical during your lifetime, you can direct your estate to sell it and divide the proceeds among your heirs. Alternately, you can set up a trust for the property’s operating expenses, then grant your heirs use of it under certain circumstances. Whatever you do, make your desires explicit, both in your will and by discussing them with your children or heirs. Ideally, involve a financial planner or an estate-planning attorney. Put everything in writing.

A vacation home can be a wonderful luxury, providing a place to get away from your day-to-day life and to build treasured memories with friends and family. As long as you think of it as a purchase rather than as an investment, you can make an informed decision about what’s right for you. Then, if you do buy a vacation home, you can approach it with realistic expectations and a good chance of enjoying it for years to come.

Why Rent a Luxury Vacation Home Rental Versus a Hotel?

In this article, we aim to provide an educational means to understanding how to save a considerable amount of money when traveling with a family or large group. In the case study below, we’ll show how Ultimate Luxury Rentals vacation homes in Tucson, AZ have saved the vacationers coming to the area time, money, privacy, and a “home away from home” feel.

First off, you may be wondering, what is a luxury home rental? Well, we will get to that later in the article. Let’s start with some of the reasons people are now renting these vacation homes as opposed to

Many vacationers choose to rent a vacation homes for a variety of reasons. Economics is one of the primary reasons. A vacation home can replace 2-4 hotel rooms at a fraction of the cost. Vacationers can eat their meals at home or even cook up their favorite meals on the barbecue. Our average vacation rental customer saves over $2000 in a 1 week stay. Privacy is another major consideration when choosing a vacation rental home over a hotel or resort. Many vacation homes include enclosed back yards with private heated pools and spas. Guest can enjoy their gathering of friends and family without interruption. Amenities are probably the main reason vacationers continue to rent vacation homes year after year. Many vacation rentals offer amenities that are superior to many upscale hotels and resorts. Pillow top mattresses with sateen sheets, plasma TVs, free wireless Internet, pool or game tables, fully stocked gourmet kitchens, private heated pools and spas and some of the most spectacular city and mountain views in town.

In addition to the home itself, the destination you choose has its own attractions and amenities. Continuing with our case study of luxury homes in Tucson, Arizona, here is a little history of the Old Pueblo and some of the history that attracts people to this particular destination.

With its mixed cultural heritage and international population, Tucson’s traditions span centuries of habitation from prehistoric Indian cultures to recent immigrants from all over the world. Today Tucson has become a destination for many visitors particularly those looking to rent a vacation home in Sonoran Desert of Arizona.

True to its Old West beginnings, Tucson’s first inhabitants roamed the area hunting mammoth and bison between 12,500 and 6,000 B.C. Following them were the Cochise , who built pit houses and used stone tools, and the Hohokam, who began farming the valley in 300 A.D.

In 1692, Spanish missionaries arrived in the valley to find the Indian village S-tukson (“black base”). In 1775, the Spanish built an outpost, the Presidio of San Augustin.

By 1804, some 1,000 people lived in the adobe village – mostly Spanish, Mexicans, and Native Americans who made their living raising crops and livestock. After the Mexican Revolution of 1821, Tucson became part of Mexico.

Looking for a southern rail route, the U.S. negotiated the Gadsden Purchase with Mexico in 1854 and Arizona became a U.S. territory. In 1867, Tucson became the territorial capital for the 10-year period, which accelerated civic progress.

In 1885 , The territorial legislature approved $25,000 to build the University of Arizona. The city continued to grow rapidly, reaching 7,000. Around the turn of the century, Tucson began attracting thousands of tuberculosis victims seeking a cure in its dry climate. In 1912, Arizona became the 48th state to enter the union.

Fueled by Industries and tourism, the population of Tucson grew rapidly – at one point welcoming 1,000 newcomers each month. By 2000, the population had reached 800,000.

Vacation rental homes in Tucson, Arizona offer a wide range of choices to visitors from all over the world. Many different neighborhoods comprise the city and offer vacationers a large selection of accommodations and activities.

The Tucson Mountains are located approximately 8 miles west of Interstate 10. The proximity to Interstate 10 makes day trips to Phoenix, Tubac, and Nogales Mexico very convenient. Some of the most desirable luxury vacation rental homes in Tucson Arizona are located in this area. These vacation homes boast some of the best city and mountain views in the state. Most of the luxury vacation rentals are located on acre plus lots with private pools and spa and offer an experience that is one with nature. Vacation rental customers may have the pleasure of seeing many of the desert’s wildlife such as the javalina, coyote, bobcat and a wide variety of birds such as hawk, dove, quail, and the state’s official bird, the road runner . Vacation rental guests will also have a wide variety of attractions such as the Sonoran Desert Museum, Old Tucson Studios, Wildlife Museum, Gates Pass, and the Saguaro National Park West. The west side of town appeals to the business traveler as well. Many of the Ultimate Luxury Rentals vacation rentals are located less than 10 minutes from the Tucson convention center. These homes’ locations put you in the heart of the most beautiful desert in the world, the Sonoran Desert. During the first 2 weeks in February, The TCC is home to the Tucson gem and mineral show the largest gem and mineral show in the world. Parents of University of Arizona students choose west side vacation homes because they are very convenient for visiting their child during the holidays or celebrating a graduation.

The Catalina Foothills is the largest mountain range in the valley and a well sought after area of town for visitors looking to rent a vacation home in Tucson AZ. Several upscale resorts and spas have made the Catalina’s their home. The Catalina foothills area has a wide variety of restaurants as well as upscale shopping at La Encanta and St Phillips Plaza. For those looking for hiking and site seeing, the Catalina area offers the Sabino Canyon Recreational Park. For vacation visitors looking to escape the summer heat (temperatures average 20 degrees lower than the city), you can take a 25 mile drive up to the top of Mt Lemmon. The Tucson vacation rentals located in this area consist of a large selection of luxury vacation rental condominiums and single family vacation homes on ½ acre lots with excellent mountain and city views.

Oro Valley has been one on the most rapidly growing areas in Tucson. Many of the vacation rental homes and condominiums are new construction and offer very upscale accommodations. There are many fine restaurants to choose from as well as some of the best golf resorts in town. The is only disadvantage to renting a vacation home in Oro Valley is the traffic. Traveling to and from Oro Valley at the wrong time of day can be quite a chore. Travel times to other areas of town such as the Tucson mountains and the east side can take up to 45 minutes or longer.

As you can see for this particular destination, there is an entourage of amenities, attractions, scenery, and history. In order to make the most of your trip, it would obviously be to your benefit to have extra funds. Luxury vacation rentals are a win-win option for your trip. Aside from your destination, they are certainly something to look into. Obviously you’ll want to find the best deal with the most credible provider of luxury rentals.