Is it a home or an investment? What is an investment home? There are 2 basic financial reasons for investing in a second home: Income stream from rentals and potential appreciation. If you do end up renting the home for more than 14 days during the year it is considered an investment home and therefore you must report all rental income. However, you get to deduct rental expenses such as mortgage interest, property taxes, insurance premiums, utilities, property management and other costs; but it must be allocated between the time the property is used for personal purposes and the time it is rented.
When purchasing a second home as an investment there are several things to keep in mind. Most rental properties in seasonal resort areas experience a peak rental season, flanked by a shoulder season of partial occupancy and a low season when the property likely stands vacant. Furthermore, restrictions such as short-term rental regulations may apply and thwart achievement of the investment buyers’ income goals.
Rental sites such as airbnb.com and vrbo.com have become very popular places to list a vacation home. You can also hire a local property manager to list the house for you and be responsible for the daily maintenance of the house such as the cleaning, checking in and out guests and verifying that all rules and regulations are being adhered to.
Tax Deferred 1031 Exchanges
If your second home is indeed an investment property you have the ability to consummate a 1031 exchange once you sell it. A 1031 exchange defers capital gains taxes and preserves equity. The owner can exchange “like-kind” property for other real estate with little or no recognition of gain or triggering of cost recovery (depreciation) recapture.
A 1031 exchange must comply with the following four basic rules:
- Property must be held for investment or productive use in a trade or business.
- Property must be exchanged for like-kind property.
- Replacement properties must be identified within 45 days after the relinquished property is transferred.
- The exchange must be completed (replacement property received) by the earlier of 108 days or the tax return due date.
As always, please consult a Tax Professional before making any decisions.
