CRS -- Why?
Second Home: The Reasons and the Regions

--Gee Dunsten, CRS Instructor--
  Popular Second Home Markets

Who is Buying Second Homes? Everyone.

The vacation market is the fastest-growing residential market in the United States. 
In the last ten years, second home purchases have doubled to a full eight percent of the 3.8 million homes sold each year.

• 50 percent of households surveyed by the American Resort Development Association indicated they want to purchase a recreation home.

• 35 percent believe they have a fifty-fifty chance of owning a second home within the next ten years, according to ARDA.

• A growing trend: instead of leasing out the vacation home, more non-related families (e.g. next door neighbors) are opting to pool resources to purchase a second home.

• Time shares, made popular in the 1970's and 1980's, are still common (e.g. the Ozarks region in southwest Missouri).

Where the Homes Are: 

Second homes are found everywhere, and include everything from rustic cabins to in-town condos in major metropolitan areas like New York, Boston, San Francisco and Chicago. 

Most people buy their homes because:

• They are accessible to hobbies or sports they find enjoyable (e.g. hiking and mountain biking, golfing, hunting and fishing, skiing, and antiquing)

• The homes have wonderful views of nearby mountain ranges, waterfronts and forest preserves.

• They are located in wonderfully quaint small towns and in exciting urban centers. They can explore the cultural, culinary and entertainment centers nearby.

• Family and/or friends live close, either part- or full-time.

How Resort Markets Differ from Primary Home Markets:

• Discretionary Purchases:Unlike primary home, there is no rush to buy. People can afford to wait years to find the perfect home, and many do.

• People are less motivated to purchase the second home for an investment purpose; people look for the home's recreation value.

• When buyers find the perfect home, they tend to buy on emotion.

• 18-24 Month Buying Cycle (Compared to 4-6 months for Primary Homes)

• Interest is piqued during the busy tourist season.

• People tend to buy in the off-seasons.

• Extra time allows new home owners to make home repairs and additions before they use the home more frequently for entertainment and recreation purposes.

•  

IRS Matters*:

When you are paying federal income tax on a second home, be aware that the IRS recognizes that the home can be treated as either property for personal use, an investment to be rented or a combination of both. 

Personal -- Personal use includes use by you, your family members, a co-owner, someone with whom you exchange use of homes or anyone who pays less than the fair-market rent. It is not considered personal use for a relative to rent the property at the fair market value on a full-time basis. Interest on the second home can be deducted the same as a primary home. 
Rental -- Cannot use the home for personal use for more than the greater of either 14 days or 10% of the number of days rented. Deductions include:

1. Expenses for overseeing the second home(ie. traveling and lodging fees resulting from a weekend trip where you spend one day with vendors and contractors or working on maintenance)

2. Annual loss. Before deducting a loss, however, you have to deal with the rules on passive activities; a passive loss generally may only offset passive income. It cannot be deducted from other kinds of income, such as salary, interest and dividends. One way to avoid a passive loss is by paying for a second home with cash; it keeps a mortgage from running up interest deductions and increases the buyer's chances of turning a profit. In most cases, the IRS assumes the venture is legal if you can show a profit in three of the past five years.

3. Farms and ranches are another common second home deduction. People may argue they have a profit motive because the land they own is appreciating (although the business as business is declining).

Mixed Use -- Subject to different mixed-use rules: 
Personal use of 14 days a year and rental of 15 days makes it a rental property, subject to one set of mixed-use rules. If you use it for 15 days and rent it for 140 days, it remains a personal vacation home.It is subject to a different set of mixed-use complexities and may result in the loss of expense deductions. (Multiply each expense by a fraction of the days rented over days of use to determine rental deductions. Note: Some people use court rulings to define fraction as the total days rented over the total days in the year.) 

A vacation home loss cannot be deducted from any other income. Expenses are subtracted from rental income in this order: mortgage interest, property tax, advertising and commissions, operating expenses and depreciation (over 27.5 years). 

* The foregoing is provided as general Federal income tax guidance only and is not intended to be a substitute for independent legal advice concerning specific facts and circumstances. State or local income tax rules or requirements may also apply. 

Magazine Articles and Resources: 
Berger, Philip and Carroll Stoner, "Homes Away from Home," Chicago, July 1997.

Brinker, Thomas Jr. and Richard W. Sherman, " Personal Residence vs. Rental Property: Analyzing Loss Carryovers," The Tax Adviser, October 1996.

Cooper, Steve Boehm, "Above It All," Better Homes & Gardens, June 1996.

Dogar, Rana, "Deductions on the Side," Forbes, June 17, 1997.

Dylan, Landis, "Second Time Around," Metropolitan Home, May 1996.

Edgerton, Jerry, "Now You Can Buy That Second Home for More Than You Think," Money, May 1997.

Lublin, Joann and Joseph White, "More Companies Relocate CEOs in Style," Wall Street Journal, April 7, 1997.

McCallen, Brian, "Second-home Living for Pre-retirees," Golf Magazine, May 9, 1997.

Schine, Eric, "There's Never Any Reason For Us To Be Bored," Business Week, July 21, 1997.

Schmedel, Scott, "Taxes -- Preparing Your 1995 Return: Dream Second Home Can Be a Tax-Return Nightmare," Wall Street Journal, March 8, 1996.

Simons, Chip, "How To Beat the Boomer Rush," Fortune, August 18, 1997.