People generally look to buy a second home for reasons revolving around pleasure — a welcoming spot to take vacations, a place for the family to gather, an opportunity to retire or spend time in a beautiful area of the country.
But there are financial concerns as well. Clients who are proactive about their purchases might find that the estate planning tactics they employ can mitigate to a great extent the cost of owning a vacation home — if not for themselves, then for the generations to come.
It helps to consider some key issues before the purchase is made. If any of your clients are considering a second-home purchase, here are some questions to ask that might help their estate and tax planning in the long run:
Who's going to hold the title?
There are several options here. Generally, a married couple will want to hold the title jointly, but even then, it can be held with rights of survivorship or as tenants in common.
The latter differences apply to when one of the co-owners passes on. Under rights of survivorship, the surviving co-owner automatically inherits full ownership of the property; whereas as tenants in common, each owner retains the right to name a different inheritor in his or her will.
The latter question may seem to revolve mostly around the relationship between the two owners, and who they see as inheriting the property. But there's an important estate consideration as well. Expensive property passing at full value into an elderly owner's estate could be sufficient to trigger the estate tax in many instances, not to mention state estate taxes. Will you rent out the property, or simply use it yourself?
If the client is looking to take tax breaks on the second home, this is a crucial question. In general, if the client resides in the second home for at least 14 days during the tax year, it can be considered a residence, and the mortgage interest becomes deductible. If the home is rented out all the time, it's not considered a residence. The application of this rule gets trickier for people who primarily rent out the second home and only spend a little time there. To qualify as a residence, the owner needs to spend 10 percent of the time the property is rented out.
