4 Things You Should Know Before Buying a Second Home
When you start thinking about buying a second home, you might think you already know all you need to know. After all, you successfully bought your first home. You’re already familiar with the best practices for buying a home. However, buying a second home puts you in a unique position that requires new considerations.
Fools Rush In
It’s easy to fall in love with a dream home, even when it’s your second home. You’re familiar with the buying process, so why not just dive in? The fact is that buying a house on a whim means you’re not committing to the same careful research and financial planning that went into buying your first home. Also, you’re probably not able to buy it just to have it, so you need to ensure that there’s a real purpose for it that means you’ll actually take advantage of the property. Be sure it matches the requirements of that purpose as well: weekend getaways mean a reasonable drive, vacationing requires access to events and locales or enough space for extended family, investment properties need to benefit your portfolio, and retirement homes ought to have easy access to care or other family members.
Fractional Ownership Can Trim Costs but Shares Benefits
“Fractional ownership” simply refers to the fact that there are multiple shareholders – probably friends or other family members – buying the property cooperatively. That means those friends and family will be responsible for part of the purchase price, easing the financial burden on you. However, "shareholder" is the key term: each person involved in the purchased has a right to benefit from the property in terms of income, priority access, usage rights, and more. You’ll probably want to discuss this option with a real estate attorney to ensure the contracts and any other documentation are drawn up properly.
Renting Out Your Home Comes with Responsibilities
Owning a second home opens the option of renting out one of your homes for some or all of the year. However, it isn’t as simple as just advertising the space, choosing a renter, and collecting rent like a paycheck. Renting out the home makes you the landlord, which saddles you with various responsibilities. Be sure you review the Fair Housing Act or talk to a real estate attorney who can explain it to you. You also need to review landlord/tenant laws at the local and state level for where that home is. The ordinances covering your primary residence won’t apply if your second home is in a neighboring state. You need to know which expenses are your responsibility, as well as how you need to notify the tenant of their responsibilities. You will at least need to have the finances available for certain levels of maintenance.
How You Rent It Out Changes What You File in Taxes
If you do choose to rent out your home, it’s important to understand how that income is filed on your taxes and whether you’re eligible for any deductions. As of early 2018, the IRS defines a property as a residence if you’ve utilized it for personal use either for more than 14 days or for 10% or more of the total days rented to others per tax year, whichever is greater. For instance, if you rented the home out for 200 days and used the home for 30 days (more than 10%), it’s considered a residence and deductions are restricted. If you only used the home for 19 days (less than 10%), it’s considered a rental dwelling, and you can file for deductions. However, if you rented it out for 180 days and stayed there for only 17 days (less than 10% but more than 14 days), the property is considered a residence again, and deductions are restricted. Be sure you’re keeping reliable records of when the home is used and by whom.
Buying any home is an investment in your future and buying your second home can expand those opportunities. By addressing each of these four elements in turn and following the same best practices you used to buy your first home, you can ensure you’ll be happy with your purchase.