Separate Second Home Fantasy from Fact

Physician's Money DigestOctober31 2003
Volume 10
Issue 20

Vacation real estate has been astrong performer over the pastfew years. However, as appealingas a vacation home may be, it willhave a significant impact on your family'sfinances. Don't let the initial excitementovershadow the real cost: a down payment,closing costs, furnishing, propertytaxes, and regular and irregular maintenancefees (eg, the house may need anew roof or hot water heater). If you'rethinking about purchasing a condo,expect to pay condo fees and the occasionalcondo assessment fee.

Before you take the big step and buy asecond home, you should review thefinancial ramifications of such a venture.Often, buyers only focus on what theypaid for a property and what they thinkit's worth today. They forget about theother expenses. Make no mistake about it,owning a second home is a very expensiveventure. Potential buyers often assumethat rental income will cover their mortgageand maintenance costs, as well asprovide a small profit. In over 30 years, Ihave yet to find this to be the case.

Second Home Candidates

When does it make sense to own avacation home? Obviously, the answer tothis question depends on the individualfacts of each case. Although no 2 physician-families are exactly alike when itcomes to finances, there are some basicguidelines and facts you should considerwhen deciding if a vacation home makesgood economic sense.

If you plan to use your second homeat least 90 days each year, owning a secondhome may be worthwhile. If youruse is expected to be substantially lessthan 90 days each year, it will likely bemore economical to rent rather thanpurchase a vacation home. The followingexercise can help you decide.


Estimate all of your expenses for agiven year and divide the total by thenumber of days you plan on using yoursecond home. This number is your "dailyrate." For example, if your mortgage payments,property taxes, and operating andmaintenance fees total $30,000 and youexpect to use the home for 2 weeks, thenyour daily rate is $2142. Then compare thisfigure to what it would cost you to rent aplace. Be careful not to count on risingreal estate values to bail you out ofyour annual out-of-pocket losses.

Tax Considerations

If you plan on renting your vacationhome, make sure you know the vacationproperty rules enforced by the IRS. Forexample, if you rent your vacation homefor less than 15 days per year, the rentalincome is not taxable, but your rental-relatedexpenses are not deductible. Ifyou rent your vacation home for morethan 2 weeks, your available deductionswill depend on the amount of time youuse the home.

Real estate facts:

If you use your vacation home less than15 days per year, or less than 10% of thetotal days rented, you may treat the propertyas straight investment property fortax purposes. If you use the property morethan 14 days, or more than 10% of thenumber of days rented, your deductionsfor rental activity expenses will be limited. Historically, real estatehas appreciated about 3% per year.

Stewart H. Welch III, CFP®, AEP, founder of the WelchGroup, has been rated 1 of the nation's top financial advisorsby Money and Worth. He welcomes questions or commentsfrom readers at 800-709-7100 or www. Reprinted with permission fromthe Birmingham Post Herald. This article was taken, in part, from J. K. Lasser's New Rulesfor Estate and Tax Planning (John Wiley & Sons; 2001), coauthored by Harold Apolinsky,Esq, and Mr. Welch.

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