- The Washington Times - Wednesday, May 9, 2007

Trips to the mountains or the ocean often lead to dreams of buying a vacation home, but buying a second home requires just as much consideration and caution as buying a first home. The rewards of a second home come with responsibilities.

So, before being swept away by breathtaking views from an oceanfront condominium or a mountain villa, vacation home buyers need to consider maintenance, tax liabilities and benefits and, most of all, the three important factors governing every real estate purchase: location, location, location.

Choosing a home within a reasonable commuting distance for weekend trips can be crucial for residents in the traffic-snarled Washington region. Some vacation home buyers have found that the blissful hours spent at their second home cannot make up for the stressful hours spent getting there.

“Most people find that a commuting time of about two hours is their limit,” says Nancy Fairall, a Realtor with Coldwell Banker Premier Homes in Berkeley Springs, W.Va. “The commute is one big reason that people who have bought a vacation home will choose to sell it. They find the commuting too much, and they thought they would use the place more than they do.”

Mrs. Fairall says families sometimes find they use a vacation home less than they expected because, as the children grow older, the weekends are often filled with sports and other activities. Sometimes a family will opt to hang onto the vacation home even when they don’t use it often, choosing to view it as investment or renting it for income to offset the cost of ownership.

Although most home buyers consider the potential long-term value of their home purchase, vacation home purchasers also need to evaluate the factors that can ensure that the property holds its value or increases in value over time.

“When you are looking for a home near the beach and you want to make sure the property increases in value, it’s best to focus on oceanfront, ocean view or bayfront properties since they are limited in supply,” says Realtor Ed Galyon with Coldwell Banker Residential Brokerage in Ocean City, Md.

“The opportunity for further development in those locations is very limited both because of natural reasons, since the land is physically limited, but also because of government restrictions on development,” he says. “It can be hard to even get a boat slip in those areas, much less a home.”

As with any residential property, location is paramount in determining the value of a home. However, the lifestyle choices of vacationers vary, so value does not depend solely on location.

“Some people who come to West Virginia come here because they want absolute peace and to live in a natural environment,” Mrs. Fairall says. “Others come here and want the beauty of the mountains, but they also want access to cultural things, good restaurants and golf courses. Those buyers usually opt to be closer to Berkeley Springs rather than more isolated in the mountains.”

Mrs. Fairall recommends renting a home for a vacation before buying one so that the buyers can get to know the area before they look for something more permanent.

In some real estate markets consumers feel they should purchase the largest home they can afford, believing that larger homes are more valuable. But vacation home markets are a little different.

“At the Woods Resort [in Hedgesville, W.Va.], there are a variety of styles including little cottages, town homes, villas and big single-family homes, in contemporary or Colonial styles,” Mrs. Fairall says.

“Probably the most popular style in the mountain areas is a log cabin, but even little two- or three-bedroom cottages, sometimes with just one bath, are pretty popular,” she says. “Buying a more expensive home may not be the best idea because, if you choose to sell, it could take longer since fewer people can afford it.”

Mr. Galyon says vacation home buyers should focus on what fits their needs.

“If you don’t need a great big place, then there’s no reason to buy one,” Mr. Galyon says. “From an investment point of view, a one-bedroom home is just as valuable as a three-bedroom home because there’s always someone who wants either one. If the location is good, everything else will work, too.”

Other financial considerations when purchasing a vacation home include whether the owners want to rent the home to other vacationers.

Mrs. Fairall says buyers who rent out their vacation homes need to provide things such as a grill, a television, a telephone, sheets, towels and kitchen supplies so renters can simply bring their clothes. Mr. Galyon says that at the beach, it’s important to have an outdoor space such as a balcony or deck.

“If rental income is important, then it’s better to buy in a place with some amenities such as a swimming pool and tennis courts,” Mr. Galyon says. “Some of the bigger complexes even have an indoor swimming pool, which helps make the place more rentable during the ‘shoulder weeks’ before and after the summer season.”

Some consumers enjoy spending time doing maintenance chores on their homes, but for those who don’t relish raking leaves or cleaning gutters, determining how these tasks can be accomplished or avoided is a crucial part of choosing a vacation home.

“Depending on the location of the home, vacation home buyers can sometimes have a management company handle the repairs or routine maintenance on the home for a fee,” Mrs. Fairall says.

“One thing to consider when you’re looking for a vacation home is the landscaping,” she says. “If you don’t want to mow the lawn every time you visit, you should pick a place with a natural setting that doesn’t require any work. In West Virginia, the more natural a yard is, the better.”

Mr. Galyon says one advantage condos have over single-family homes is that the building maintenance and grounds maintenance is the responsibility of the condominium association.

“When you are evaluating a condominium, you should look at the viability of the condominium association,” Mr. Galyon says.

“If the building and the grounds look good, that’s a good sign, but the red flags are if the association has had any special assessments,” he says. “If the property is in poor condition plus the association has a small reserve, that should be a red flag. Buyers can always talk to the management company to get a sense of what’s coming in terms of major maintenance issues.”

In addition to determining the financial health of the community or condominium association to which they are considering moving, second-home buyers should estimate the tax consequences of their purchase.

“If buyers are purchasing a second home and not renting it out, they are allowed to deduct the mortgage interest payments and real estate taxes on the home just as they do with their primary residence,” says Michael Martin, a tax expert with Martin and Associates in the District.

“You are allowed to deduct these expenses on two properties, your primary residence and a second home,” he says. “Real estate taxes are deductible on as many homes as you own.”

Once vacation home owners choose to rent the property, the tax issues become more complex.

“If you buy the second home as an investment and never use it yourself, simply using it as a straight rental property, then you have to report the rental income on Schedule E,” says Bernie Fisken, president of Fisken & Co. (www.fisken.com), a taxation counseling service in Bethesda.

“You can then assign all the operating expenses for the property, including mortgage interest, real estate taxes, insurance, fees to a management company, repairs and even mileage used to drive to inspect the property to offset the rental income,” Mr. Fisken says. “It depends on the actual dollar amounts, but it’s possible to set this up in a way to receive a steady income stream.”

Mr. Martin says this same system of offsetting the rental income with these deductions applies as long as the homeowners and all family members use the property 14 or fewer days per year.

Homeowners who use the property more than 14 days and rent out the property must calculate the proportion of the use of the home between personal and business use and then split the expenses and rental income accordingly.

When vacation home buyers choose to sell their property, they might not qualify for the capital gains tax exclusion to which so many homeowners have become accustomed.

“If you have lived in the property for two of the last five years you can exclude $500,000 of the capital gain on the property as a married couple or $250,000 as a single person,” Mr. Fisken says. “But vacation homes don’t qualify as owner-occupied unless it becomes your primary residence for those years before the sale of the home. The smart person moves into their second home to make it their primary residence if they want to sell it.”

Mr. Martin suggests that some people could choose to sell their primary residence at retirement and move into the vacation home, then sell the vacation home after two years, thereby sheltering both residences from capital gains taxes.

“Another option for someone wanting to sell their vacation home is a ‘Starker Exchange’ or a ‘Like-Kind Exchange,’ which allows you to sell one rental property and buy another,” Mr. Martin says. “This requires the use of a real estate agent as a facilitator, and both properties have to be rental properties, not personal residences.

“This could be an option for someone who wants to sell a vacation home but wants to buy another,” Mr. Martin says. “The newly purchased rental home could later become the primary residence after a certain period of renting the property.”

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