Buying a Second Home

A vacation home or condo can be a good investment, provide rental income, give you a major income tax deduction, and even turn into your residence after retirement. But before you can have any of those benefits, if you are like most people, you will have to find a loan to purchase that summer home.

When it comes to taxes, the IRS lets you treat a vacation home the same way you do your first home, but a vacation home can be harder and more expensive to buy than a primary residence.

The IRS will actually let you write off the interest on two separate homes for up to combined total of $1 million in mortgage debt.

While the IRS treats both the primary and vacation homes the same tax-wise as far as the deductibility of interest paid (capital gains, however, are an entirely different matter) lenders do not. Getting a lender to agree to loan you the money for a second home is more difficult because second homes are riskier.  Your lender knows if times get tough, money gets tight, and you can't afford to pay two mortgage payments, odds are you will make the payment on your primary residence and let the second one slide.

When you buy a second home, you must also have a cleaner credit history, a higher FICO credit score, and more discretionary income to qualify for that mortgage. Buying a second home means you are committed to furnishing and maintaining it and paying the monthly utilities, taxes and all the other costs associated with home ownership. In some cases, your monthly housing expenses will double, and the lender will want to ensure you have enough income available to cover the increased costs.

For millions of Americans, the advantages of a second home — vacation destination, price appreciation, tax benefits and rental income — far outweigh the costs and disadvantages.

What do you think?  Is a second home in your future?  Leave us your thoughts, comments or questions.

Home Based Business Brings Recapture Concerns

Working at home has become almost as common as living at home.  Some employers will tell you the two are synonymous while many spouses – especially seniors and aging Baby Boomers not used to having their partner in the home all day—wonder if home-based work really is a good idea.

If you have turned the den or study into a home office – via a complex remodel or by simple paint and wall covering – you are not alone.  Since 1990, the number of home workers has grown at a rate of 15 percent a year mainly because of the convenience, tax and selling advantages.

It's now relatively easy for taxpayers to deduct the cost of a home office.  To qualify for a deduction, the space must be used exclusively and on a regular basis for either the entire business or its administrative and management activities.

A home office deduction is comprised mainly of depreciation, utilities and insurance. For example, if a home has 2,500 square feet and the old den now deemed "the office" is 250 square feet, then 10 percent of the utilities and insurance are deductible.

The actual office depreciation is 10 percent of what would be a depreciation deduction if the entire home were being depreciated for tax purposes. (Depreciation is not allowed on a typical principal residence, so the square footage allotted to "residence" would not qualify.) Supplies and other expenses directly related to the home office are fully deductible.

The area used for your home business can be depreciated using the 39-year depreciation method. The lower of your home's adjusted cost basis, or its market value on the day business use began, can be the starting points.

However, all these benefits do come at a price. The tax law states that if you sell your home at a gain any depreciation for a home office will have to be "recaptured." That means that any profit on the business portion is taxable as capital gain.

In a nutshell, if you bought your home for $100,000 and sold it for a net figure of $300,000, your capital gain would amount to $200,000. Because the business portion does not escape the new primary residence exclusions, 10 percent, or $20,000 (the 250 square feet of office space) would be taxable.

One way of possibly avoiding the home office tax would be to eliminate your home business two years before selling the home. If you can find another place to work, you could revert the usage back a 100 percent primary residence.

Because depreciation can be confusing, it's always best to consult an accountant or a tax attorney. The Internal Revenue Service's Publication 587 "Business Use of Your Home" is accessible on the Internet.

Condo Prices Reveal Housing Trends

In trying to get a read on how much real estate markets are slumping, some people may be looking at the wrong indicator.

The National Association of Realtors (NAR) tracks sales of both single-family homes and condos.

In the third quarter of 2005, NAR stats for single-family homes show that prices fell 1.2 percent from a year earlier, with 30 percent of markets showing declines.  

Condo prices not only dropped more steeply, 2.1 percent, but 46 percent of markets showed declines.   Which gives a truer picture?

Find out more here…

Then leave us your comment about the article.  Do you agree with the author that condo prices reveal housing trends?  Share your opinion with us.

Tips for Selling Your Home in Winter

What makes selling a home more stressful?  Selling it in the middle of winter.  

The lawn is brown, the weather is usually bad and, unlike the longer days of summer, you have less time to show it off during daylight hours.

But not everyone has the luxury of waiting until the traditional spring or summer home buying season to plant that "for sale" sign, and while it's true that in most areas you'll probably have fewer buyers during the winter, you will have less competition from other sellers.  

That makes staging — the concept of showing your house at its best — even more important.   Be prepared to put a little effort into it. "It's more difficult to make something look really appealing this time of year," says Ron Phipps, broker with Phipps Realty in Warwick, R.I.  

If you do it right, you can really make your house stand out.

Have you had any experiences in selling a home in winter?  Leave us your comment below about the article.    

Energy-Saving Home Improvements and Taxes  

Since 2006 was an election year, it's not surprising that lawmakers spent much of it creating and adjusting tax laws. Now, as taxpayers put these new measures into practical effect by filing their annual returns, many will find changes that produce some nice tax savings.

If you replaced your home's drafty windows last year with new, energy-efficient panes, make sure you file the long Form 1040, along with Form 5695, to get the corresponding tax credit. That's just one way to take advantage of the energy-efficient home improvement provisions included in the energy bill that took effect Jan. 1, 2006.  

Simple upgrades, such as the new windows or added insulation, offer relatively small tax breaks. You can claim more generous credits if you added solar water, heat or power systems to your house. If you didn't get the improvements in by the Dec. 31 deadline to claim the credit this year, you get another chance by completing the work this year; a couple credits also carry over into 2008.  

"What's great about the energy credits is that everybody can take them," says LeValley. "There are no income phaseouts. It's not about how much — too little, too much — you earn. It's about just making the right purchase."

What is your opinion about new tax laws?  Leave us a comment about the article.