As retirement approaches, many Americans start to think about their finances and where to invest or move their assets. For some, purchasing a second home is an important part of retirement preparation. With careful planning, this can be a
very valuable and significant option. If you are thinking about buying a second home, the first step is to take inventory of your current and future finances. Be sure to determine the sources of your future income (pensions or government benefits) in order to evaluate how much you can afford.
If you are planning on using the second home as a rental during part of the year, don’t count on that rental income as part of your income. You never know if you are going to have a period without a renter. After undertaking this assessment, you will have a better sense of what you will be able to afford without stretching yourself too thin.
When actually looking at properties, take into consideration the same factors you would when buying your primary residence such as costs, taxes, and location. Ask yourself whether you want a part-time vacation home or a year-round home that you can eventually move into after you retire. If you are looking for the latter, you will want to ensure that the neighborhoods you are looking at don’t shut down during the off-season. The last thing you want is to move into your second home and run out to buy a gallon of milk, only to find out that every store in the area is closed for the season!
Other important considerations when it comes to deciding whether to purchase a second home relate to money and taxes. If the second home is considered a residence-meaning you don’t rent it out or use it for other business uses-any interest on your mortgage is deductible just as it is on your first home. In other words, you can deduct up to $1 million in interest on both homes (meaning you can deduct $1 million total, not $1 million per home). However, if you rent out your second home, the rules change and vary depending on how long your rent it out. Generally, if you have renters for more than 14 days a year, you will have to report any rental payments as income, but you will also be able to claim any mortgage interest and other costs during the rental time as business expenses. Lastly, depending on local laws, you likely can deduct the property taxes on any number of properties you own (regardless of whether you rent them out). Overall, these rules can be very complicated and can change depending simply upon how much time you spend in the second home. Therefore, it is probably worth it to talk to an experienced attorney before you take on a rental property in order to ensure that you don’t run afoul of local or federal tax authorities.
For retirees, non-traditional properties may also be worth considering. These options include condominiums or retirement communities, and these often also include some significant benefits. Some of these communities offer services that take care of certain household chores such as mowing the lawn, snow removal, and painting. Others provide gyms, pools, and golf courses. And in some retirement communities, there may even be meal service or some form of medical care. If you pursue this option, you will likely purchase the real estate and then pay an additional ongoing fee to the community association for its services. However, it is important to note that these benefits have some pitfalls. In many communities, there are restrictions on what you can do with the exterior of your home, with your landscaping, on whether you can rent your home, and, in some extremes, on the guests you can have spend the night.
Second homes can create important sources of income and provide flexibility and excitement to your retirement. If you are a retiree, a second home could be used for investment purposes, or it may just be a way for you to live out the retirement you have always dreamt of. Whatever your reason, remember, you are still making a real estate purchase and need to exercise the appropriate level of care.
（Summer 2008） Copyright © 2008 Hisaka Yamamoto (Photo: © Lvnel | Dreamstime.com)