Consider an Investment in Vacation Real Estate

A vacation home can bring a lifetime of enjoyment and priceless memories to you and your family. It also can be viewed as a smart long-term investment that offers asset diversification and tax benefits.

Rosita Beach, Baja Mexico (by Barb Cochran Photography)

An Improving Environment
According to the National Association of Realtors® (NAR) 2014 Investment and Vacation Home Buyers Survey — which covers existing as well as new construction homes — vacation home sales rose sharply in 2013, up nearly 30% to an estimated 717,000 transactions compared with 553,000 transactions in 2012.1

NAR chief economist, Lawrence Yun attributes the surge in vacation home sales activity to the robust recovery in the stock market, which has bolstered investor confidence as well as the discretionary budgets of high-net-worth consumers.

Who Are Buying Vacation Homes?
NAR data indicated that the average buyer of vacation property in 2013 was 43 years old, had a median income of $85,600 and paid a median purchase price of $168,700, up 12.5% from $150,000 in 2012.1

When asked what prompted them to buy a vacation home, the vast majority (87%) said they wanted to use it as a vacation getaway for their family, 31% said they planned to use it as a primary residence in the future, 28% cited investment diversification/a good investment opportunity as key reasons, and 23% said they plan to use the property for rental income.

Eighty percent simply cited good timing as the driver behind their decision to buy.1 While clearly making a comeback from the dark days of the housing bust, NAR data indicates that vacation home sales are still significantly below their previous peak set in 2006.1

The Second Time Around
Although a vacation home is, by definition, a luxury, buying one is a major financial decision that requires special considerations.

  • Identify your goals. A vacation property can serve multiple purposes — it can be a treasured retreat for family and friends, a retirement home or a financial boon to retirement income (if the property is sold). Depending on your goal, there are legal and tax mechanisms in place to help make your decision advantageous.
  • Shift investment priorities. The objective of real estate investing historically has been to generate current income, yet purchasing vacation property for investment or retirement typically requires a different mindset that focuses on long-term capital appreciation.
  • Make the most of tax benefits. Aside from the standard deductions for mortgage interest and real estate taxes, the capital gains exclusion that applies to qualified real estate sales can be beneficial for individuals who own highly appreciated residential property. The basic IRS qualification states that you must have owned and used the property as your primary residence for at least two years out of the five-year period ending on the date of the sale. Single homeowners who qualify can exclude $250,000 in gains on the sale of the property, while married couples may exclude double that amount — $500,000 — in capital gains as long as one or both of them satisfied the ownership test and both satisfy the use test.2

A word of caution: The tax laws governing such transactions are complex, change frequently, and require detailed documentation. Be sure to seek expert advice, particularly regarding state-specific income taxes, before conducting any real estate transactions.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your tax professional to discuss your personal situation.

1National Association of Realtors® news release, “Vacation Home Sales Surge in 2013, Investment Property Declines,” April 2, 2014.

2Internal Revenue Service, Publication 523, “Selling Your Home.”

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Photo Credit: Barb Cochran Photography