DIVA - Second home

Well, Diva, as we get through 2017 tax time, what new plans have you for this year, 2018? The new tax bill will have some of us running for the hills and others of us praising the tax gods. Given that, what have you been thinking about in terms of buying a second or third home? The new tax bill has lowered the mortgage interest deduction to $750,000 from $1 million. Depending on the size of your current mortgage, you may not be able to deduct the interest on that second loan. Umm-hmm. This changes things for some of us. Then you throw in the elimination of interest deduction on existing and new home loans, and the bit about state and local income tax deductions being capped at $10,000 … and buying that second home isn’t as financially appealing as it was in years prior. Yikes! You guys know I just bought a vacation cottage last year. This new rule hurts!

But we enter such a peaceful state of mind whenever we walk through those doors.  We think it’s worth it. Plenty of experts agree with us that there are other factors besides taxes to consider when pondering owning a second home. Those valid factors are things like:

  1. Vacation or Rental? What’s the end goal here? Do you want a place that’s all yours for vacationing once a month, a few times a year, or twice a year? Or do you want to have a rental property for extra Benjamins? You’ll need to decide how long you’ll spend at this property. In order to qualify it as rental property, you can’t spend more than 14 days at the property each year. Anything over that, your crib becomes personal or vacation property. If I’m paying for a place, I sure as heck plan to spend more than 14 days in it. So our lake cottage qualifies as a vacation home. Our home owners association actually doesn’t allow us to rent out our homes, unless the renters will be there for a full season (three month minimum). I find this ensuring. Long-term renters tend to care more for the property, than those who are in-and-out vacationers.
  2. Fixer Upper or In Ship-shaper? Maybe you’re looking for a hobby, and renovating a home is right up your alley. Yay! Go for it! The lake house I purchased last summer (people insist I stop calling it a cottage, because it has six bedrooms. But in my head, that’s what it is) really didn’t need any work. But I wanted to make it ours. So I spent a ton of time decorating it my way and I must admit the end result has been beyond fulfilling. My ultimate Pink Elephant goal is to have it featured in one of those interior design magazines. So if you follow my social media posts, you’ll be seeing A LOT of updates this summer as I break this Pink Elephant into small bites. Small bite #1 – hire an interior decorator to help me bring to life all the beautiful pieces I’ve cultivated over the years. Check! We’ll be ordering the wallpaper next week. What you have to keep in mind with a second home are how much small expenses like this add up. Not to mention the umpteen number of trips you’ll need to make to Home Depot. These all totally impact your bottom line of expenses. As do the extra utility expenses. All utility companies are NOT created equal. So beware. Our water bill in Michigan is managed by the municipality. Because the water has to be imported in from somewhere (even though, hello, the place is 1/10th of a mile from Lake Michigan) the water fees are ridiculous. We spend $150 a month just to have access to the water! So that’s our minimum bill before a drop of water is even used. Ridiculous I know. So if you plan to visit, don’t be surprised when I hand you a three minute hour glass to track your short showers! Be absolutely sure you can afford emergency expenses, and that’s anything from a broken bathroom door handle to a broken picture window to broken or frozen pipes. These things DO happen, and being a homeowner gives you only one number to call for help – yours.
  3. Business or Pleasure? If you own a business, perhaps your new digs could be purchased through your LLC and used as an office. This type of thing is great for you dentists, therapists, and lawyers who are having trouble finding cute (let alone available) commercial space.

Once you’ve determined how you want to use the home, you’ll get into the nitty gritty of tax breaks with your tax professional. You’ll need to consult tax rules for each of the three scenarios above. For example, you don’t want to get into hot tax water because of sliding over your 14 days at the property.

One last thing, some of the issues above with buying a second home, as well as new issues that will arise due to the new tax laws—like an influx of property to buy due to people unloading—may or may not be affected depending on where you live. Divas in New York or California may have more reason to push the pause button than those in Texas or Michigan. Get the facts, and be prepared to chill if necessary while things get sorted. But I am definitely in support of owning your own five-star luxury second home. So go for it!

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