Vacation Homes: How to Get the Most for Your Money
Everyone would love to have a vacation home for a getaway. It could be a house high on a hill with a spectacular view, in a remote location in the woods, or in a resort community near the ocean. Any way you think about it, though, it’d be pretty nice to have a place to get back to when the pressures of work and family get too great. You’d never have to pay for a hotel, you could fix it up any way you wanted, and it’d be yours and yours alone.
There are other advantages to a vacation home, though.
If the home is occupied by the owner less than 14 days a year, or if it’s rented out regularly on a time-share basis, it can be considered an investment. This puts the vacation home into a completely different tax category.
IRS Article 1031 is designed to allow investors to defer taxes when selling an investment property in order to acquire one of equal or higher value. It can also be interpreted for vacation homes that are investments on the basis of appreciation. Make sure that your attorney or CPA holds a certified letter from you stating that you bought the vacation home with an eye towards appreciation; if it’s disputed by the IRS, you have that documentation to back it up.
The other situation, however, where 1031 might apply is if you rent it out regularly (even if you don’t claim the property as an investment on your taxes). If you’re actually in the house for less than 14 days a year (or less than 10% of the time that others rent it), you fall into this particular category.
Of course, if you hang on to the vacation home for a long time, it could wind up being your retirement home when the time comes. And if the area winds up becoming a hot spot in future years, the value of your investment will go nowhere but up, bringing you a sizable profit should you decide to sell.