What Retirees Need to Know about Buying a Vacation Home in 2020

While many retirees have considered buying a vacation home to escape cold winters, to rent out for income, or simply have a gathering place for far-flung family members, there are a number of financial matters to consider that could make ownership onerous.

Taxes, maintenance costs, insurance, and potentially rental-management expenses are among the factors that can make the difference between a peaceful passive investment and a problematic money pit for any retiree. Depending on the location of the home, the cost of ownership may need to account for property taxes, utilities, and homeowners’ fees, among other things when buying a vacation home.

But there can be monetary benefits as well. A vacation home can appreciate in price over time, making it a potentially valuable asset. Or it could be an income-generating vehicle if you rent the home to guests either solely or during times when you’re not using it. Still, one thing retirees should keep in mind from the outset is that you shouldn’t view a vacation home primarily as an investment.

It’s certainly a valuable asset, but it shouldn’t be thought of as a replacement for stocks and bonds. That’s because it’s not as liquid: You can’t count on selling or buying a vacation home for a good price when you need the money.

One of the first questions retirees need to ask before buying a vacation home is whether you can afford a vacation home in retirement.

Retirees are typically living on some type of fixed income and may lose sight of the fact that the costs of a vacation home can rise faster than their income. You must have enough of a nest egg to live on so that you don’t need to make a forced sale of the property.

Costs go beyond the purchase price when buying a vacation home. In addition to property taxes and maintenance costs inside and outside the residence, if you intend to rent the property you likely have to pay a fee for someone to manage the property.

As for taxes, if you sell your second home, you’re not entitled to the capital-gains tax exemption available when selling a primary residence. That exemption—up to $500,000 for married couples—is applicable only for people who have lived in the home as a primary residence for at least two of the previous five years.

There is one way around the prohibition on claiming an exemption for a second home when buying a vacation home. Say you are interested in downsizing from your retirees primary residence. You can sell it and use the tax exemption. Then you can move to your vacation home for at least two years, making that your primary residence. At that point, you can sell this home, again enjoying the tax exemption, and then move to your new primary residence.

If you decide to rent your home, you can do it for up to 14 days without owing taxes on the rental income (state and local rules are diffrent based on the area). After that, you pay tax but can deduct at least some of your rental expenses.

Beyond the tangible costs, there can be some intangible ones as well. If you intend to keep the vacation home for the rest of your life, it would become part of your estate and subject to inheritance issues.

Some of your children may want to keep the house, for instance, while others may want to sell. Talk to the kids and ask how they feel. If there’s a split, find a way to give the house to those who want it and find another legacy for the others.

Giving the house to the children who want it can be done by putting the home into a limited liability corporation (LLC) with an operating agreement that defines it. Basically, this would allow each child to have a stake in the entity that owns the home rather than the home itself.

There are also emotional issues to consider when deciding whether to buy a second home as a retirees. On one hand, you might feel compelled to visit your second home instead of taking other vacations you might prefer. A lot of people like to think of it as a family compound and the home can host memorable occasions with relatives and friends.

Questions Retirees Should Ask Before Buying a Vacation Home

The questions every retirees should ask your Florida real estate agent are the same as they would be if you were buying a vacation home anywhere.

Among them, you might ask the following:

• If the house isn’t new, why is the owner selling? Are there any known problems listed on the seller disclosure that are big red flags?
• How long has the house been on the market? This might help you get a sense of how willing the owner will be to sell and negotiate on the price.
• What do other properties comparable to the one I’m looking at sell for?
• What’s the property tax rate in this area?
• What are the fees that are standard for buyers to pay at closing? Which fees are typically the responsibility of the seller? What’s negotiable?

In terms of finding the best REALTOR® or real estate agent, you’re going to want someone who knows the local market, particularly in the areas in which you’re looking, and also experience negotiating deals in your price range. You should also ask for any professional accreditations and memberships they may have.

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