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Let’s Go to the Beach

Flush with Cash? It’s Vacation-Home Time!
by Daniel Akst

May and June are big months for buying second homes, and business owners lush with profits are out looking at vacation properties. They’re not alone. The proportion of home sales in this category roughly doubled in the 1990s, to 6%, and there’s not any reason to expect much of a downturn ahead despite the recent run-up in mortgage rates. Should you join the club? Sure, if you have the extra cash and your family would enjoy it. There are also financial advantages to consider.

First off, you’ll be glad to know that financing is no longer the headache it once was. Nowadays, buyers need a down payment of only 10% of the purchase price to secure a mortgage, assuming the property is considered good security by the lender. As recently as a year ago, you needed to put down at least 20%, says Doug Perry, a vice president at Country-wide Home Loans Inc. in Calabasas, Calif. The key is convincing the bank or mortgage company that you’re buying a genuine vacation home rather than a rental properly, because mortgages for the latter typically carry interest rates that are 0.25 points to 0.375 points higher than rates for owner-occupied properties. That said, don’t give up the option to rent; it makes vacation homes affordable for many.

Besides the attraction of having a great getaway from the office, a vacation place can be a useful tax shelter. Assuming you finance the purchase, you can deduct the interest on total mortgage debt of as much as $1 million covering up to two houses. That kind of deduction can offset an awful lot of income while freeing up cheap capital for your business. Also, you can rent your vacation property for whatever the traffic will bear for as many as 14 days per year and pay no taxes on the income. But make sure you’re in compliance with any relevant regulations — which can include state and local taxes. In Florida, for example, there is a resort tax on any property rented for less than six months, as well as a sales tax on all rentals. Properties rented for fewer than 30 days at a time will also have to meet the state’s public lodging code, which sets health and safety requirements.

According to Mark A. Calabria, a senior economist with the National Association of Realtors, now is a good time to go vacation-house hunting, because these properties are expected to appreciate at a faster rate than regular homes are in the years ahead. What’s driving up prices is a lack of supply and a growing demand from aging baby-boomers (many of us, in other words). The most desirable and accessible places — within a few hours’ drive of a major city — are already developed, meaning little future growth in supply. Calabria adds that resale-conscious buyers from all over the country may want to consider the Sunbelt simply because properties there aren’t susceptible to regional economic variations. Vacation properties in places such as the New Jersey shore, for instance, appeal mainly to buyers in New Jersey, New York, and Philadelphia. But a house in Sarasota, Fla., might draw buyers from anywhere in the U.S., including retirees who wouldn’t consider chillier locales.

But aren’t all these homes a bit pricey now? Right, although higher mortgage rates could finally moderate rising vacation-home prices everywhere — good news for folks who have enough cash flow to swing the payments. (Try adjustable-rate loans.) Meanwhile, surf’s up!

Reprinted from FSB May/June 2000

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)