You may be considering investing in a vacation home as part of your retirement goals or just because you feel it’s a good investment. With real estate prices back to where they were pre-2008 in most of the US, those looking to add a vacation home to their portfolio are considering buying before prices rise. The good news is that the favorable home prices are helping the housing market recovery. Before you invest, make sure you know the tax advantages (or disadvantages) a vacation home investment may bring you if you plan to sell a property to fund a vacation home.
Understanding 1031 exchanges can make the difference between paying thousands of dollars in taxes when you sell one piece of property to buy another one, such as a vacation home. The property must be of ‘like-kind,’ in other words a business or investment property exchanged for another business or investment property. Because this can be complicated, you consult a tax professional if you are considering a 1031 exchange transaction. A sale and purchase of this type is a business transaction requiring different Tax ID numbers assigned to each property. A qualifying exchange allows you to defer capital gains from one property if you buy a comparable property within the federal prescribed time limit. Additionally, the property sold and the property purchased must be in one of the 50 US states, with territories of the US not included in this provision.
If you are considering a 1031 exchange, be advised that if our US law-makers approve a reduction in personal tax brackets, the additional taxes needed to offset the change may result in the 1031 exchange provision being eliminated at some point which may impact you in the future. For now, the 1031 tax provision is in place for those that invest in real estate and seek tax benefits on those investments.
For those that purchase a vacation home as an additional property and don’t use the 1031 exchange provision, you still need to do your due diligence on understanding property tax rates for non-residents, vehicle licensing requirements, and other non-resident fees that may impact your vacation home purchase. If you add a vacation home to your portfolio keep your advisor informed so that he/she can add it to your financial plan and asset information.
If you’d like to discuss this and/or any other investment topic, please contact our Las Vegas Financial Advisory Office