Buying A Second Home For Retirement

Buying A Second Home For Retirement

As retirement approaches, many Americans start to think about their finances and where to invest or move their assets.  For some, purchasing a second home is an important part of retirement preparation. With careful planning, buying a second home for retirement can then be a very valuable and significant option.

Look at Current and Future Finances Now

If you are thinking about buying a second home, then the first step is to take inventory of your current and future finances. Be sure to determine the sources of your future income (pensions or government benefits) in order to evaluate how much you can afford. Are you planning on using the second home as a rental during part of the year? If so, then don’t count on that rental income as part of your income. After all, you never know if you are going to have a period without a renter. After undertaking this assessment, you will then have a better sense of what you really can afford.

Think About the Property Year-Round

When actually looking at properties, take into consideration the same factors you would when buying your primary residence. For example, think about costs, taxes, and location. Ask yourself whether you want a part-time vacation home or a year-round home. Do you plan to move there after you retire full-time? If so, then you will want to ensure that the neighborhoods don’t shut down during the off-season. Obviously, the last thing you want is to move into your second home and run out to buy a gallon of milk, only to find out that every store in the area is closed for the season!

Other Things to Consider About Buying a Second Home for Retirement

Other important considerations in deciding whether to purchase a second home relate to money and taxes. If the second home is considered a residence by the IRS—meaning you don’t rent it out or use it for other business uses—interest on your mortgage is deductible just as it is on your first home. In other words, you can deduct up to $1 million in interest on both homes ($1 million total, not $1 million per home). However, if you rent out your second home, the rules change depending on how long you rent it out. Generally, if you have renters for more than 14 days a year, then you have to report rental payments as income. However, you will also be able to claim any mortgage interest and other costs during the rental time as business expenses.

Lastly, depending on local and state laws, you likely can deduct the property taxes on any number of properties you own (regardless of whether you rent them out). Overall, these rules can be very complicated. Furthermore, they can change depending simply upon how much time you spend in the second home. Therefore, it is probably worth it to talk to an experienced attorney before you take on a rental property. That will then ensure that you don’t run afoul of local or federal tax authorities.

Consider Different Kinds of Properties

For retirees, consider other types of properties, too. Options include condominiums of retirement communities. These also include some significant benefits. For example, some of these communities offer services that take care of certain household chores such as mowing the lawn, snow removal, and painting. Others provide gyms, pools, and golf courses. And in some retirement communities, there may even be meal service or some form of medical care. If you pursue this option, then you will likely purchase the real estate and then pay an additional ongoing fee to the community association for its services. However, it is important to note that there are some pitfalls with these benefits. For example, in many communities, there are restrictions on what you can do with the exterior of your home. There may also be rules about your landscaping, whether you can rent your home, and, in some extremes, on the guests you can have spend the night.

Owning Two Homes in Retirement Can be Great with Proper Planning

Second homes can create important sources of income and provide flexibility and excitement for your retirement. If you are a retiree, a second home could be used for investment purposes. Conversely, it may just be a good way for you to live out your dream retirement. Whatever your reason, remember, you are still making a real estate purchase. Thus, you need to exercise the appropriate level of care. Your tax or estate planning attorney may be able to better advise you on how to buy a second home.

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