As life progresses, homeowners often move from purchasing their primary residence to acquiring investment properties – and eventually, a vacation home where the family can gather and create lasting memories. Baby boomers have been buying second homes at record rates as they step into retirement.
To make the vacation home experience truly enjoyable, several key factors must be considered!
Goals for the home
Families should ask themselves several important questions when considering a vacation home. Their goals may range from short-term plans, such as how many days they’ll personally use the property, to long-term visions, like creating a legacy retreat for future generations.
Here are a few key questions to help guide your decision!
Is rental income needed to support it financially?
Even for those who pay cash for a vacation home, ongoing expenses include property taxes, insurance, maintenance, and Homeowner’s Association fees. Adding a mortgage to the mix makes it even more important for many buyers to rent out the property to generate income, especially in the early years of ownership.
Some homeowners choose to rent out their vacation properties through various online platforms. If you go this route, it’s essential to check local municipal regulations and Homeowner Association rules regarding short-term rentals. You’ll also need to consider whether you can handle the cleaning and linen changes yourself or if local services are available to manage those tasks.
In most resort areas, professional property managers can place your home in a rental pool, allowing for short-term rentals with minimal personal involvement. These managers can provide estimates on how many nights per year your property is likely to be rented. You’ll have the flexibility to reserve dates for personal use – though you may need to decide whether to enjoy the home over the holidays or rent it out for maximum income.
Short-term rentals do come with higher costs for management, cleaning, and linens, but depending on occupancy, the potential for higher nightly rates may offset these expenses compared to long-term leasing.
Should I rent the vacation home long-term?
To secure a future vacation home, some families purchase a property and initially rent it to a long-term tenant for a year or more. This strategy helps cover ownership costs in the present while keeping the home as a future retreat. After a decade or so, they may decide to stop renting it out and use it as their own vacation getaway – or even as a retirement home when the time comes.
Are there any tax benefits or ramifications if the vacation home is treated as an investment?
As with any investment, it’s wise to consult your tax advisor to understand potential tax implications. Tax laws are constantly evolving, so be sure to ask how any recent changes might impact your vacation home purchase.
Here are a few key questions to consider:
- Can I deduct the mortgage interest?
- Can I take depreciation?
- If it is an investment, is there a limit on the number of personal days I can use?
- What expenses of running the property can I deduct?
- If it’s a rental and I want to depreciate it, what is the maximum number of days I can use it personally?
- House trading possibilities?
Some vacation homeowners purchase properties with the intention of using them as “currency” for trading stays in other destinations. This can be a great way to reduce lodging costs while exploring new vacation spots. There are several websites available to facilitate these home exchanges.
Is financing any different for a vacation home?
Most any 1-to-4-unit mortgage lender can help you with a vacation home. They will typically qualify you under normal underwriting guidelines. However, it is usually a good idea to use a lender who is familiar with vacation properties.
Can I buy a vacation home with my IRA?
I get this question a lot – yes, you can buy a home using funds from your IRA! However, there’s a key restriction: you cannot use the property personally. To do this, you’ll need to set up a self-directed IRA.
Why consider this option? Suppose you live in Boulder but plan to retire in a warm island climate. You could purchase a condo in the islands through your IRA and rent it out full-time as an investment. When you’re ready to move in, you’ll need to disburse the property from your IRA and pay any applicable taxes, and then you can use it personally.
This strategy involves many details, so it’s crucial to consult a CPA who specializes in IRA real estate ownership.
Can I do a 1031 Exchange for a Vacation home?
If you’ve owned a Colorado rental property for years and are ready to leverage that equity for a beachside retreat, a 1031 exchange could be an option. The key rule is that you must exchange one investment property for another. So, can you do it? The short answer is yes!
However, it’s essential to work with your CPA to understand the details, including rental requirements, personal use limitations, and the potential to convert the property into a full-time retirement home in the future.
How should I hold the title to a vacation home?
You can hold title to a vacation home the same way you would for a single-family home – in your personal name, as a single owner, or with others as Joint Tenants or Tenants in Common. However, holding the title in an LLC may be a better option for a vacation home, especially if you plan to rent it out regularly.
An LLC allows you to manage the property more like a business while providing legal protection in case of a lawsuit from a tenant. It also offers flexibility for future ownership changes, as shares of the LLC can be sold or distributed among family members. Given the legal and tax implications, consulting with a professional is essential to ensure everything is structured correctly.
Exit strategy or succession planning?
Owning a vacation home is exciting, but it’s also important to plan for the future – whether that means selling the property when it’s no longer needed or keeping it in the family for generations. Without a plan, passing down a vacation home can become complicated. For example, if a couple leaves their vacation home to their four children, ownership suddenly expands. Over three generations, that number could grow to 10 or even 20 owners, each with different opinions on what to do with the property. Some may see it as a cherished retreat, while others might view it as a financial burden.
Creating a clear succession plan can help prevent future conflicts. Setting up an LLC, as mentioned earlier, allows for structured ownership and a defined process for managing the property across multiple owners. To ensure a smooth transition, it is wise to work with an attorney experienced in vacation home succession planning. They can tailor a plan that aligns with your family’s goals and ensures the home remains an asset, not a source of stress.
Get a referral!
If you’re ready to start pursuing your vacation home dream, your Realtor® here in the northern climates can connect you with a local expert in your desired destination. Working with a knowledgeable professional in that market will ensure you have the insights needed to make informed decisions.
Duane graduated with a business degree and a major in real estate from the University of Colorado in 1978. He has been a Realtor® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 2,500 transactions over his career. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail duaneduggan@boulderco.com, call 303.441.5611 or BoulderPropertyNetwork.com.