Second Home Thoughts

[Rich]

Not sure if this belongs here or under Investment Stratagies, but anyway... My SO and I would like to purchase a second home for cold wx use down in the Savannah GA area. We currently live on Cape Cod and the winters here are blah! Anyway, my primairy home is paid off, as is a piece of land next to us we purchased back in 1992. The lot is worth around $350,000, so after taxes (our basis would be $55,000) I figure we might clear around $250,000. We're gonna retire around the winter of 2007, but I'm fearful of two things; rising house costs down south and what I believe to be a real estate bubble where I live now. We'd like to buy a home in the $300,000 to $400,000 range, using as downpayment whatever we cleared from the sale of the lot. Just looking for some knowledgable opinion and thoughts from the group.

Thanks,

 

[73ss454]

Rich,
You should qualify for a 1031A exchange which I think is perfect in this case. When you sell your property you'll have 45 days to locate another property for purchase. As long as you purchase a property of equal or greater value no tax should be due. If the new property is less than you may have some taxes due on the diff.
Read further on ipx1031.com.
JOE

 

[Beachbumz]

1031 will not work if exchanged for a second home! So consider selling the lot (this assumes it was held for investment, ie mortgage interest, if any, was deducted as investment interest on returns), and purchasing a 'rental' property in Savanah. You must rent it out, but I'm sure you will need to go down there often to do repairs.

Later on you can convert it to a true second home and you should be ok (consult your tax adviser).

Doing this will allow you to purchase more house and save a bunch in taxes (if done correctly!).

Beachbumz

 

[Rich]

I looked into the 1031 exchange and for various reasons it won't work out for me (good thought though!). The rental property idea is interesting. How does buying a "rental property" get me a tax benefit (at least initially) over buying a personal use home?

 

[Spanky]

Profits from selling a principal residence are tax exempt for up to $250,000 or up to $500,000 for a qualified married couple.

 

[cute fuzzy bunny]

He's selling the adjacent lot to their principal residence, not the principal residence.

A tax exchange is likely your best bet, provided it can be done within the limits described.

 

[Patrick]

We'd like to buy a home in the $300,000 to $400,000 range, using as downpayment whatever we cleared from the sale of the lot. Just looking for some knowledgable opinion and thoughts from the group.

Thanks,

As long as your second home is more than 50 miles away from your first and you spend at least two weeks a year there, your mortgage interest can be written off the same as your first home. My CPA says (I had a similar situation) you'll be better off renting it though, because you'll collect a much larger percentage of your expenses in rents than what the tax savings on the interest writeoff represents.

Patrick

 

[Martha]

Talk to your tax advisor about this:

Do a 1031 exchange of the proceeds from the sale of the lot held for investment into the Savannah property. The exchange should work if you hold the Savannah property for business purposes, as a rental. Rent out the Savannah property for "a while". Eventually sell your home and shelter the gain to the extent Spanky described. Move into what was the rental home. No tax to pay until you sell it. If you wait a couple of years, you can sell this new home and shelter the gain up the the limits Spanky described, except that you will have to pay tax on depreciation recapture. Is this right? This would mean that you never would pay tax on the proceeds from the lot sale. If so, mighty fine deal curtesy of the IRS. I suppose I could look it up.

Martha

 

[tryan]

Check with your tax advisor ... but I thought if you sold a lot adjacent to your primary it was tax exempt if you also sold the primary within 2 years.

Heard this when I bought land ... the seller was saying she had 2 years to move to keep all proceeds (land and primary resident sale) tax exempt.

 

[Beachbumz]

Tryan,
You have to look at the facts and circumstances, that's why he really needs to talk to a tax advisor. If he deducted the mortgage interest with that of his house, you may be right (as opposed to investment interest. The problem there is he may not be selling his main house and then there would be no way to do a 1031. If he never had a mortgage on it, he might be able to go either way with it. (It has been a while now since I looked at this kind of situation, so maybe Martha_M will correct me if I'm wrong or had additional comments).

Also, they quietly (meaning I didn't see it hehe) changed the law regarding tax exemption for a personal residence that was originally acquired through a 1031 exchange. You now have to own the property for at least 5 years, and then all the other rules apply.

Beachbumz

 

[Craig]

You definitely would benefit from a little time with a tax advisor ... someone who understands 1031's. We've used that technique as well, and it is well worth the effort. It does seem perfect for your situation, as noted above ... 1031 into rental property down south, and much later convert that rental property into a personal residence. Depreciation recapture will apply, but that is not a deterrent ... would have to have some tax benefit from the depreciation for recapture to be an issue.

Best of luck.

 

[spike]

Better talk to a tax attorney or a good CPA. First of all is land and a rental house like property? Renting out property while your out of state can be a big problem. Interest deductions for a second home are not tax deductable. Unless it's a rental property. You could have capitol gains taxes on the lot if you sell it.

 

[Martha]

A vacant lot held for investment purposes and a rental property that will be used for rental can be like kind. See tax topics: http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html