If you're thinking about a second home as an investment, you might listen to what real estate economist Thomas Powers has to say.
"There are no home runs out there," he says. "You need inflation, and it's not there right now."
By home runs, Powers, senior vice president and chief economist of Goodkin Research Corp., a consulting company near Fort Lauderdale, Fla., means real estate appreciation that pays big returns when the property is sold. Inflation this year is forecast to be about 5 percent, Powers said; last year it was 4.4 percent.
"That's not all that attractive, and you have to remember the big negative about real estate -- it's illiquid," Powers said.
It's best to view a second home as an asset geared toward personal and family enjoyment, real estate experts say. If a second home turns out to be a good investment in later years, so much the better.
A second home can be classified as just that -- simply a second residence -- or as an investment property, which qualifies the home for depreciation and other investment-tax treatment.
To classify a property as a second home, you must designate it as such on your tax return, and it must qualify under the occupancy rules, said Russ Hale, a lawyer in the tax department of a law firm in Orlando, Fla.
To qualify as a second home, it must be used by you or your family at least 14 days a year or, 10 percent of the time the home is in use. In other words, if the home is used 100 days a year, then you or your family must use it 10 days a year to keep its tax qualification as a second home.
Although the Internal Revenue Service is silent on the matter, Hale said, one would presume a second home could periodically be rented out as long as the occupancy requirement is met.
However, renting the property on a regular basis but treating it as a second home would prohibit taking depreciation and other investment tax advantages.
Boats and motor homes may qualify as second homes if they are used for the required number of days and if they have toilet, sleeping and cooking facilities.
As part of the 1987 Budget Reconciliation Act, Congress put a $1 million cap on mortgages for up to two homes for purposes of deducting mortgage interest on federal income taxes. For most people, that mortgage cap presents no problem.
But investment property is different. Individuals who own property as an investment and have a gross income of $100,000 or less can deduct up to $25,000, plus the amount of the rental income, if the total amount of deductions is justified, Hale said.
In other words, if you fit that income category and if your investment property brings in $10,000 in rental income, you could have as much as $35,000 in deductions.
The $25,000 deduction is phased out in increments as the owner's gross income increases to between $100,000 and $150,000, and is eliminated at $150,000.
Hale said that once the income limit is exceeded, deductions, to the extent that they exceed the income, are suspended. But they can be used when the property is sold.
Joe Bert, chairman of Certified Financial Services Inc., a financial-services company in Altamonte Springs, Fla., thinks that any real estate in a good location and purchased at the right price has the potential to be a good investment.
People considering a second home should consider two factors: the personal benefit to be derived from the property and the possibility of long-term appreciation.
"Certain parts of the country are doing well, while others aren't doing so well," Bert said. Many homeowners were spoiled by rapid appreciation during the days of double-digit inflation, he said.
A buyer must decide if he really wants a second home or would be using it to enter the real estate investment game, Bert said. However, a homeowner who buys a second home primarily for family enjoyment still may make some money on the investment in the long run, he said.
Lois Kane, vice president and manager of the Real Estate One office in New Smyrna Beach, Fla., said buyers of beach residences sold through her office are about evenly split between investors and second-home buyers. Like all real estate, beach property appreciates at a considerably slower rate as inflation cools to relatively low levels, she said.
"We don't have properties losing value," she said. "They're just not climbing as fast as they used to."
G.A. Repple, president of G.A. Repple & Co., a Maitland, Fla., financial-services company, said he warns clients against being motivated solely by tax deductions.
"If a client wants a second home and can afford it, I say, fine, buy it," Repple said. But he added, "I try to get clients out of debt. A second home can eat you alive."