By David Rodeck
From Kiplinger's Personal Finance
If you’re considering a second home, think carefully before making this major purchase. The wrong property can turn your dream into a nightmare.
Here’s what you need to know about buying a second home in retirement:
Prices are around an all-time high. Second-home purchases have cooled significantly since 2020, mainly due to high mortgage interest rates. Even so, homes in desirable vacation spots are still pricey. “Many towns now have full-time remote workers competing with retirees,” says Ian Katz, a real estate agent in New York City.
Be conservative about budgeting, he says. Make sure you can keep up with ongoing costs for the new home, even after a possible drop in income.
Borrowing is more challenging. If you’d like to finance your purchase, mortgage rates are typically 0.5 to 0.75 percentage points higher for a second home versus a primary home. And if you do have to borrow, mortgage rates are the highest they’ve been in 20 years.
You should also expect to make a down payment of 10–20 percent on a conventional mortgage for a second home, though a larger down payment could give you a better chance of qualifying for a lower interest rate, says Katz.
A test drive leads to a smarter purchase. Katz has seen retirees rush second-home purchases without genuinely understanding the area they’re buying in, which can lead to regrets. “Get a hotel or Airbnb for an extended stay first,” he says. “Sample the daily vibe.”
Upkeep and maintenance add up. People underestimate how much they’ll owe in annual upkeep and maintenance on a second property, says Mark Charnet, a financial adviser in Pompton, N.J. “Any given year, the windows might need to be replaced, the roof could leak or the water heater could break.”
A newer place may require only 1–4 percent of the home value for maintenance and emergency repairs, but an older place can cost much more.
Property taxes can be a nasty surprise. States such as Florida, Nevada, and Texas don’t have income taxes, but they can really stick it to you with property taxes. Katz recommends checking how the property tax bill will be assessed after you buy. Some localities readjust based on the new selling price.
Tax breaks depend on usage. You can deduct the home mortgage interest and property taxes for a second home against your personal income, the same as you do with your primary residence. To qualify, you must live in the property at least 14 days a year or 10 percent of the days you rent it out, whichever is greater. You can rent out a second home for up to 14 days per year without owing income taxes. If you rent for longer, you’ll owe income tax on the rental income, but you’ll qualify for more tax breaks, such as the cost of repairs to the property, maintenance, insurance, and hiring a property manager.
When you sell your second home for a profit, you will owe taxes on your entire gain.
©2023 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.
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