Vacation Temptation

Financial PlanningPosted on June 15th, 2017No Comments

Written By: Ryan Klemm, CFP®

With summer in full swing, it’s likely that you have some kind of vacation or relaxation days on your calendar for the next few months. Depending on how you choose to Live Big®, the vacation may involve a beach rental, a cabin in the woods, or maybe a cottage in your favorite town. If the place is really special, you may find yourself thinking “I wish I lived here!” and daydream about what it would be like to own the property as a vacation home. As always, before making such a big decision, we encourage you to keep a few things in mind to ensure the purchase aligns with your Live Big goals.
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While enjoying the luxury and relaxation of a vacation home sounds enticing, it is important not to overlook the maintenance, use, and financial aspects of owning a vacation home. With proper planning and consideration for the following items, you can feel confident that purchasing a vacation home will add value to your personal and financial life instead of becoming a vacation nightmare!
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  1. Location, Location, Location
    • Because vacation homes are commonly used as places to get away from one’s daily routine, it is important that a person is familiar with a location before making the decision to purchase a residence. Turning on the TV and hearing that West Palm Beach is the place to be doesn’t necessarily mean that it’s the place for YOU to be. When purchasing a vacation home, you will have “locked in” a specific location that you will frequently visit and it is important that you are comfortable and happy while you are there.
  2.  Consider Your “Whys”
    • The first step in getting value from your vacation home is to understand how you would like to use the second home. Is your purchase decision based around using the property as a getaway, having a location for the family to get together or owning an asset that can be shared by your family after your passing? No matter the reason, it is important that your “why” aligns with your financial goals.
      •  For those who desire to transition to their vacation home as their retirement home, it is important to know that if you use the vacation home as a personal residence for two years out of a five year period you will be able to receive the federal exemption on the gains from your home sale up to $500,000 ($250,000 for individuals).
      • If you are purchasing a vacation home solely as a real estate investment, it is important to remember that home values and the value of desired vacation spots fluctuate. There may be a better location to consider purchasing real estate if your purpose in purchasing the home is to maximize the return on your investment.
  3. Tax Implications
    • Like everything else in your financial life, owning a vacation home has tax implications. For example, you can rent out your vacation home for up to fourteen days without reporting the rent received as taxable income. If you rent the property out for more than fourteen days, however, then it will be classified as an investment property and the rent you receive must be reported. Additionally, you can retain the deductions and exemptions for owning the vacation home as long as your occupancy of the property is limited to the greater of fourteen days or 10% of the total days it is rented. If you exceed this limitation the home is classified as your personal residence and you lose the ability to deduct rental expenses and depreciation expenses. A major benefit to owning a second home is your ability to deduct the mortgage interest (in addition to that of your personal residence) up to $100,000.
  4. Cost of Living
    • Because vacation homes are in desirable locations, it is likely that the average home price, maintenance costs, security costs, and insurance will be higher than in a “regular” location.

Making an educated decision that doesn’t cause financial stress can be the start of your path to relaxation and make owning a vacation home a very rewarding life decision. At Yeske Buie, we will help you determine if the purchase fits within the scope of your financial plan, and we also collaborate with your tax planner and estate attorney to ensure that your vacation home does not become a burden to you or your family.

Whether or not you find yourself interested in purchasing the home you stay in while on your next vacation, we hope that you have a safe and enjoyable time that makes you think “I hope this never ends!”.
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“Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves, Who am I to be brilliant, gorgeous, talented, fabulous? Actually, who are you not to be? Your playing small does not serve the world. There is nothing enlightened about shrinking so that others won't feel insecure around you. We are all meant to shine. And as we let our own light shine, we unconsciously give others permission to do the same. As we are liberated from our own fear, our presence automatically liberates others.” ~Marianne Williamson