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Tidal Wave of Buyers seen off the Texas Coast
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6 Comments ::  :: Real Estate, Market Analysis, Investment, Second Homes |
Tidal Wave of Buyers seen off the Texas Coast
Every eight seconds, another baby boomer turns 60. And as the trendsetters of the generation head for retirement, they're yearning for their dream homes.
Baby boomers have determined the course of the housing market for the last 30, 35 years. In the '70s, they were kids coming out of college. They weren't ready to buy a house, they rented apartments. There was this huge building boom in the rental apartment market.
In the late '70s and early '80s, they started to turn 30 and get married. They bought their first house, so you had a big wave of builders building relatively small, relatively inexpensive homes.
During the 1980s through about 2000, this population segment became older and more affluent, and started to buy bigger houses, termed by many as "McMansions." The trend of remodeling and buying second residences has reigned for the past 10 years.
This report helps determine what baby boomers will do next -- especially as housing markets cool and builders need to consider what models will be sellers that stand out among the increasing inventory.
"If you're a participant in the housing industry, you ignore baby boomers at your own peril because they are your primary market still."
10 Reasons Why Retirement for Baby Boomers Will Be Different
Looking around at what the industry is coming up with and what retirees are starting to do, here is what the editors of Topretirements see as key differences for baby boomers vs. their parents when it comes to retirement locations:
1. Baby boomers do not want to be labeled as old.
No baby boomer wants to admit he is over the hill. All one has to do is look in the early retirement chat rooms and message boards to see references to “geezer communities” - the “seniors” concept is a big negative for most baby boomers. Hence the drive by developers to find the perfect name for their developments – active seniors, active adults, 55+ communities, etc. Or perhaps not bother to give the name any connection at all to age. Instead, build boomers the facilities they want, give it the most romantic and adventurous name they can come up with, and then stand back and let the baby boomers move in, who will conveniently ignore that the development was built for people over 55.
2. More baby boomers will move farther away from where they live now.
Baby boomers have seen the world and most are not afraid of it. If they can find a place that promises more fun, more connections, and a richer environment than where they are now – they’re “out of here”.
3. More boomers will live in 2 places.
The economic resources are there for many of the post WWII generation. For these people, particularly for those who now live in the east and the midwest, living in 2 places allows them to maintain a connection with their current community, while enriching their life by spending the winter in a warmer place.
4. Baby boomers will take more chances and be a bit more adventurous than their parents.
This isn’t to say that there weren’t plenty of trailblazers among our parents. We’ve seen that it can be done, and this gives us permission to go on from where they left off. Boomers will probably move farther from home, live in more unconventional communities, and be willing to start over again if the first choice doesn’t work out.
5. The types of “retirement communities” are going to diversify
This idea relates to the point just made, today’s new retirees are going to be more adventurous. So as real estate developers try to anticipate what the hot concepts are going to be, they are going to have to get a lot more creative than the stereotypical concept of throwing up a clubhouse, installing a couple of shuffleboard courts, putting up a fancy gatehouse, and then calling it “Leisure Acres”. Instead, the amenities and lifestyle themes are going to become richer and more creative.
Waterfront and Golf communities are the current hot ticket for retirement communities, but they are very difficult and expensive to build. Eventually the developers will either run out of room or the people to buy into them. Baby boomers are going to revolt if they have no choice but a sterile gated community that is hermetically sealed from the rest of the world. So the trend towards more integrated communities that combine recreation, commerce, jobs, and culture will become more popular. The good news about the Texas Coast is that there is a lot of room for future development in all the coastal real estate markets, each with miles of undeveloped coastline and plans already in place to develop the kinds of communities baby boomers are looking for.
6. The types of retirement communities are going to get more specialized.
Just the past 2 years has seen many new types of communities coming on stream. In Boulder, Colorado the Silver Sage “co-housing” community is being built. This approach to community housing appeals to a certain segment who want to live more intensely with their neighbors, sharing occasional meals together in their community center, and even meditating together. Another idea is the new urbanism concept seen at Cinnamon Shore on Port Aransas and The Shores on South Padre Island, these self contained communities are like mini-towns with all the amenities in place to where you could live without ever leaving the community. See Cinnamon Shore Development
7. Small towns are going to reemerge.
There is a reason why small towns loom so large in our imaginations – they are a powerful ideal where everyone knows one another and shares a sense of community. Many boomers are going to seek out this ideal, looking for towns that are growing, have a vital downtown, plentiful recreational opportunities, and a charming appearance.
8. Cultural centers are going to be popular
One form of this is already taking off, with many universities across the country either participating in or permitting developers to build “university-affiliated” developments. These particularly appeal to alumni and former faculty who would like to live in their old college town. The college courses, atmosphere, and sports events that they can participate in provide a rich experience.
Another development idea that is going to be strong with baby boomers is the idea of communities that are built around culture. A good example of this is Rockport Texas. Rockport is a community where artists or would be artists can develop their arts amidst like minded neighbors. This trend has the support of many professionals who believe that creative engagement is vital to prolonging mental faculties. See Rockport Texas
9. Living in or near major cities will be more prevalent
A lot of baby boomers either never got to live in the big city, or they only lived in the suburbs. Cities are great for retirees – they are stimulating places, they’ve got public transportation, and something to do every second. Good examples of this can be seen on Galveston Island, which is only minutes from thriving Houston Texas and Port Aransas on Mustang Island, which is less than a two hour drive from market leading San Antonio-Austin Texas. See Galveston Texas
10. More baby boomers will work
True, hundreds of thousands if not millions of baby boomers have inexhaustible resources. But only 50% of today’s working adults believe they have enough money to live comfortably in retirement – either because their expectations are high (after all, they are baby boomers!), or because of the gradual disappearance of the defined benefit pension and concern about the viability of social security. An even more important reason why more boomers will work is because… they want to. A recent Gallup Poll found that 60% of those who said they had enough money to retire still expect to work in retirement. Most of the people who expect to work say they will be looking for part time work. And the key to working is to be living in a place where you can get a job – even if your choice of work is to volunteer.
This article is reprinted from www.topretirements.com with permission of the publisher
Boomer’s At A Glance
- Baby boomers make up, at approximately 78 million, the largest generational demographic in history.
- They are a diverse group, spanning 18 years (1946-1964), representing a broad spectrum of cultural, economic, psychosocial and global influences.
- Outnumbering the 50 million Gen Xers, over the next three years, the population of 45-64-year olds will have grown 30 percent, compared to the stagnant growth of 25- to 44-year olds.
- Even beyond the sheer size of the demographic, boomer households spend an additional $10,000 more every year on consumer goods and services than their younger cohorts.
- Boomers spend over $2.1 trillion/year of this unprecedented wealth on consumer goods and services including $79 billion on home improvements last year alone. They have $28 trillion in assets and control 67% of the nation’s wealth.
- 80% of boomers use computers, one third of them going on-line every day. Direct catalog marketers estimate that 70% of on-line purchases are made by women, the majority in the boomer demographic.
- They also represent 50% of car purchases and 74% of all prescription drug purchases.
- With more established careers than younger generations, many boomers are at the peak of their earning potential. What's more, eight out of ten boomers say they don't plan to retire.
- As a result, over the next seven years, there will be 80% growth of 60-69 year-olds, the leading edge of the boomer demographic, working full or part-time creating even more assets and wealth.
- Not only will they continue to earn income, but within the next decade, many boomers will be managing inheritance windfalls.
- 55% of boomers agree that they have no particular brand loyalties, with 68 percent of women over 35 saying that “the older they get, the more they enjoy trying new things.”
- As they age, boomers will be vocal about their needs and are on the verge of flexing their combined social, economic, and political muscle. They are a force with which non-profits, institutions, the government, politicians and society as a whole will both want to and have to reckon.
Baby boomers are not only the greatest market opportunity today, but a powerful force shaping the future of our society.
According to NAR, the number of sellers who were at least 45 years old or older in 2006 was 54 percent. This is the same percentage as for 2005. This means that baby boomer activity has remained consistent. Furthermore, the age at which people reach their peak spending is 46.5. The largest proportion of boomers was born in 1960; 2006 was the year this group should have hit its spending peak. This may partially account for why the market has been so strong for the last seven years, as the bulk of the boomers moved through their peak spending years. The current statistics also demonstrate that the prime time to purchase a second home is when the buyer is between the ages of 50 and 60. Currently, many boomers are purchasing second homes in the Sunbelt with the idea of trying out the lifestyle while they are still working. When they retire, they will sell their big family home and make their second home their primary residence.
Opportunity: According to NAR, approximately 17 percent of the boomers plan to purchase real estate in the near term. In 2007, look for the boomer market to continue to be strong, as those born in the late 1950s and the early 1960s purchase second homes in anticipation of retirement. Expect to see more of them selling their large family homes and trading for a property with better amenities and less maintenance. Planned Waterfront and Golf course communities should continue to be popular as senior communities that cater to affluent and active seniors who want minimal property maintenance.
The Texas Gulf Coast is particularly popular with baby boomers, especially from Texas, the Midwest, the East Coast, California and Florida. With property prices around half the price of comparable beachfront property from the east and west coasts, and with steady appreciation rates, the Texas Coast is the real estate market to purchase property for retirement, second home or investment for at least the next 10 years. See our article on why invest in the Texas Coast for more information.
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Thursday, February 08, 2007 3:41 PM | |
"Most Boomer buyers don't need to move," said Norman Cohen, an Atlanta-based builder and 2006 Chairman of the NAHB 50+ Housing Council. "They'll change homes when their lifestyles change--whether it's because they're starting a home-based business or they just want to live maintenance-free." |
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Thursday, February 08, 2007 5:33 PM |
I've read that we're a demographic time bomb. Will we crash the market just when I retire?
From an economic perspective, boomers have three key traits: There are a lot of you. You didn't choose to have big families. And you are going to live a mighty long time.
What all that adds up to is that by 2030 there will be barely three Americans of working age for every person over 65, compared with a ratio of five to one today. That's going to be a significant challenge to Social Security. It might also be a problem for stocks.
To finance their retirement, folks over 65 will have to sell assets, but there will be relatively fewer young Americans to buy them.
This shift could certainly be another long-term drag on your returns. Economist James Poterba of the Massachusetts Institute of Technology guesses that it might cost investors an average of a quarter to half a percentage point per year.
But don't waste your time listening to any market guru who promises that demographic trend lines can tell you when to hop out of stocks to miss the boomer-driven crash. There may never be one, Poterba says.
The so-called age wave is a widely known and easily tracked statistical event, and the market has a way of calculating information into prices long before any zero hour arrives.
Several forces could blunt the impact of boomer aging. For example, Jeremy Siegel, author of "Stocks for the Long Run," has argued that a rising middle class in India and China will seek the safety of U.S. equities. And boomers surely aren't going to try to sell all at once.
Some will hardly sell at all. A big chunk of this country's assets are in the hands of the richest investors. "Most wealthy people save a high percentage of income," says Roger Ibbotson, founder of Ibbotson Associates and professor at Yale School of Management. "They aren't really digging into their savings when they retire." |
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Thursday, February 08, 2007 5:36 PM |
What about my biggest investment of all - my house?
Christopher Van Slyke, a financial planner in La Jolla, Calif., tells clients two things about real estate and retirement.
First, before you start counting your profits, think about how much you'll pay for the house you'll live in next. Unless you're willing to move far away, the cost of your empty-nest dream cottage has shot up too.
Second, consider the recent explosion in prices an anomaly. "The returns of real estate in the long term are somewhere between corporate bonds and stocks," reckons Van Slyke.
Many boomers face another challenge. As pension expert Olivia Mitchell notes, you won't be able to tap all your home's equity if you've already borrowed heavily against it.
As with stocks, demographics could also dampen home prices as boomers first downsize and then, ahem, move on. Some economists think real estate is even more vulnerable to those trends. "Equities are traded in the global market," says MIT's Poterba. "I presume foreign investors will be somewhat less interested in my four-bedroom colonial."
But once again, though this may lower returns, it doesn't necessarily portend a crash. Housing economist Karl Case of Wellesley College notes that boomers span a wide age range. "I'm 60, and if I'm going to be in my house another 20 years, the baby boom still stretches out another 20 years behind me," says Case. "The pattern isn't as cliffy as you might expect."
Even if the value of your house slides, Case adds, you have built-in insurance: The cost of the house you're buying will have gone down too. |
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Monday, February 26, 2007 9:38 AM |
Maximizing Second-Home Sales
As Boomers head into retirement, this market promises growth for brokers
By Eugene L. Meyer RISMEDIA,
Disposable income and significant assets, including access to lots of cash, characterize high-end and second-home buyers, who are generally unfazed by the ups and downs of interest rates or real estate prices.
In 2005, second home purchases accounted for 40% of all sales, according to the National Association of Realtors, a number that was expected to dip last year as investor-flippers backed off. But as Baby Boomers continue their inexorable march towards retirement, there remains enough wealth to keep the high-end, second home industry perking rather than peaking.
Strategies for reaching these asset-rich buyers vary widely, from heavy use of the Internet-with sophisticated Web sites providing virtual tours of luxury properties-to word-of-mouth referrals arising from a broker's personal sphere of influence.
Location is also a key factor in how properties are marketed, and to whom. Resort and vacation areas tend to attract second home buyers who don't need to be near jobs and schools, key concerns for younger homeowners. Those buying second or soon-to-be retirement homes like to be within driving range of children and grandchildren, but not too close to them.
"The bottom line is that the high-end, second-home buyer is looking for a gathering place for the extended family and a central location, because all the kids are grown up and scattered around," says Debra Savage, who relies largely on referrals to sell homes at Deep Creek Lake, Maryland, a four-season mountain lake resort area within a three-hour drive of 23 million people.
At the other end of the high-end, second-home market, Baird & Warner sells condos in downtown Chicago to suburbanites who also want a pied a terre. "They want the best of both, the ease and convenience of living in the city, and they also want the escape of the suburbs," says Rick Druker, the Chicago real estate firm's managing broker. Those whose primary residence is "a little bit further out," say 20 to 50 miles, "look at downtown as a vacation spot."
When these Baby Boomers reach retirement, they sometimes sell their house in the ‘burbs and move up to a larger condo in town, according to Druker. Typically, these buyers are doctors, lawyers and financial company executives.
But not all the firm's in-town, second-home clients come from nearby suburbs. One apartment unit on fashionable Michigan Avenue sold recently for more than $8 million as a second home to a downstate business owner. How do you reach such buyers? Druker says most start their property search on the Internet, where Baird & Warner displays eight photos with every listing.
Michael Saunders & Company, based in Sarasota, Florida, also places a high premium on Internet marketing. In an average week, according to Alexa.com, traffic to the high-end firm's Web site was 15 times higher than to Coldwell Banker's Florida site, 65 times higher than Prudential Palms, 142 times higher than Premier Properties and 900 times higher than RE/MAX Properties Sarasota.
"It's our biggest focus," says Tom Heatherman, a company spokesman. "As your income goes up, the likelihood you'll use the Internet also goes up. When you go to our Web site and you are a high-end buyer, you can click on videos we've purchased and take a virtual tour of some of our priciest listings."
Viewers who click on Saunders' "video magazine" are treated to more than a virtual tour. Here are Dick and Dawn Duques, owners of a Casey Key property listed for $20 million showing their house, and talking about their home and their lives. "We moved right as the kids went off to college," she says. "We wanted to have a place where they would still want to be with us."
Saunders does print advertising as well, in the Wall Street Journal, and with such high-end outlets as Christie's Great Estates, Luxury Portfolio, Veranda Magazine, and Leading Real Estate Companies of the World, of which Saunders is board chairman. "We have a lot of give and take referral-wise between those marketing partners," Heatherman says.
Many of Saunders' buyers are looking not just for second but for third homes. "You've probably heard about the bubble bursting in Florida, but it's the high-end, $3 million and above, that's really held up," says Heatherman.
"There's a lot of overlap between the luxury market and second homes," he adds. "As boomers retire, they are coming down and buying a luxury residence, in many cases the primary residence. A lot buy a second home and love it so much they use it more and more. The next you know, it's no longer a second home, it's the primary home, and very often they sell off the primary home or keep both and spend most of their time here."
While special financing programs may attract first-time home buyers-and brokers marketing to them may promote their firm's subsidiary financial services, obtaining a mortgage at a good rate is often not an issue for high-end and second-home buyers.
There are, however, other services that high-end buyers have come to expect. Sellers of such properties "get specific higher-end expanded advertising," says Lynn Kosner, who manages Baird & Warner's North Suburban office. "The property gets on two or three extra Web sites," such as luxuryportfolio.com and Baird & Warner's special luxury home site, which also links to properties in other "luxury destinations."
"We make sure that every one of our agents understands our luxury portfolio program, so they can distinguish which property goes where," says Kosner. In 2006, her office sold eight properties at prices ranging from $5 million to $17.6 million, and 108 properties between $2 million and $5 million. "Most of these homes were purchased as land value for" tear-downs, "or by end users maintaining the homes. Occasionally, some are purchased as second homes for city dwellers, which we find remarkable."
The method of payment also distinguishes the high-end market. "They are what we mostly consider cash buyers," Kosner says. "They very rarely add a mortgage contingency to their offers. They usually don't need to qualify for a mortgage."
Resort communities tend to generate their own markets, as families first rent vacation homes and then decide they like the area enough to buy. These "duty desk" buyers typically go directly to a broker's office to begin searching in earnest.
"We have so many visitors to Myrtle Beach, 13 million a year, we have a new audience every week," says Don Smith, president of Coldwell Banker Chicora, a prominent South Carolina brokerage. "Most of our marketing is targeted to those in town. We do some direct mail to those who've visited before. We use the Internet for our [broader] market presence."
Many visitors pick up the home guides distributed for free, take them home, and then look up properties on the Internet. Web searchers from the firm's "feeder market" to the north who are interested in the 60-mile coastal "Grand Strand" can click on the Coldwell Banker web site and, Smith says, "directly pass through to our web site, which is very functional and user-friendly."
Smith says his second-home market benefits from the older buyer's wish to be within easier driving range of their primary residence. "For a lot of folks who used to retire to Florida it's such a long drive down, while Myrtle Beach is centrally located, including almost even to New York.
Twelve hours going north gets you a long way up the road, whereas Florida is two full days with an overnight stay."
Smith's firm trains its agents in the care and handling of high-end buyers since, he says, "the upper end buyer expects a higher level of service," when they buy a Mercedes or Lexus or a house. "They expect a greater level of attention. Communication is mainly the key. The preview-trained agent knows every single community failing into their price point."
Back at Deep Creek in the mountains of western Maryland, the owners of the Wisp ski resort last spring sold 60 "ski-in, ski-out" home sites for $25 million in one day, during what was billed as a "launch weekend." The owners worked with a Denver, Colorado marketing firm, which sent out 220,000 invitations to persons whose names appeared on various mailing lists.
The 120 people who showed up for these North Camp lots had purchased a "reservation" in the form of a $1,000 refundable deposit. They were treated to a Friday night party, a free hotel room and breakfast. The buyers were primarily boomers, many of whom had visited the area before, and most were from the Washington metropolitan area.
"They expect a .3 percent response rate, which is about what we got," said Karen Myers, managing partner of DC Development, which owns the Wisp resort. "It was good. However, it was really about six months of effort, mailings, talking to prospects." She is planning another launch weekend later this year for golf course home sites.
"What it boils down to," she says, "is families realize at some point that they need to be able to settle down from all the daily hustle and bustle and do some fun things together. It's primarily a second home market, but retirement is becoming a bigger and bigger facet of our business."
And then there's that cash access. "An average of 25 to 40 percent pay cash for properties they purchase here on any given year," says Myers.
"That gives us a wonderful stability in our market. For the percent of home owners without any debt service, there is no incentive to sell at a loss. They just wait it out. There was no bidding on our ski-in ski-out sites. We just had a plat and a price list. Thirty-eight percent of our North Camp closings were cash."
For buyers and sellers alike, it's good to be rich.
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Monday, February 26, 2007 11:27 AM |
Affluent Buyers Want Privacy, Confidentiality
Forget preconceived notions of the wealthy as inheritors of family money. Rather, a recent survey of 683 Coldwell Banker Previews International agents reveals that the typical buyer of multimillion dollar home is a self-made millionaire with ‘new money.’
“Successful business owners, self-employed professionals, and highly paid corporate executives are fueling the boom in new money households. Despite what many think, new money dominates” [compared with inherited wealth], says Laurie Moore-Moore, founder of the Institute for Luxury Home Marketing.
Top professions of luxury consumers, according to the Coldwell Banker Previews survey:
Business or corporate executive, 88 percent
Physician, 37 percent
Lawyer, 31 percent
Financial professional, 30 percent
Entertainer, entertainment executive, or professional athlete, 14 percent
A typical down payment for luxury consumers, say respondents, is 20 percent to 30 percent, or about $400,000 to $600,000 on a $2 million home. Additionally, according to the survey, 25 percent of clients put down as much as 30 percent to 50 percent of the sale price.
Affluent Clients Want to Be Discreet
Practitioners serving affluent clientele are expected to provide a high level of personalized service to both buyers and sellers, the survey says.
The No. 1 special need that extremely affluent clients require, according to 78 percent of survey respondents, is privacy and confidentiality. “The ability to be discreet” was also identified as a top criteria for selecting a real estate professional in research done by Unique Homes magazine and The Institute for Luxury Home Marketing.
“Wealthy consumers want to know their agent isn’t discussing their transaction over cocktails,” says Moore-Moore.
Other necessary skills for real estate professionals working with luxury consumers, according to Coldwell Banker’s survey:
Customized service, 69 percent
Ability to work well with executive assistants, CPAs, and attorneys, 44 percent
Inside scoop on the market, 36 percent
Ability to provide emotional support, 17 percent
Personal rapport with clients, 11 percent.
Must-Have Amenities
When asked about "must have" amenities buyers require in their luxury homes, 60 percent of respondents answered that their customers want media rooms and 60 percent answered that their customers want "wired" homes.
On the flip side, the sales associates polled said that their clientele believe that gourmet kitchens, granite countertops and wet bars are no longer considered luxuries.
— By Camilla McLaughlin for REALTOR® Magazine Online
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Wednesday, February 28, 2007 5:30 PM |
Buying a Second Home by Kiplinger.com
A change in the tax law gets a lot of credit for a recent boom in the number of Americans buying second homes. The change allows most home sellers to take up to $500,000 of profit tax free. Before 1997, sellers generally had to buy a more expensive home to avoid being taxed on profit from a sale. Now you can trade down to a less expensive house and use profit from the sale of the big place as a down payment on a second home.
A recent study found that more than one in five second-home buyers were using equity from the sale of a primary residence to finance their purchase. There's no doubt that many baby boomers are in their peak-earning years and therefore more able to afford a second home. And, rapid price appreciation of homes in many areas has certainly stoked demand for second homes as terrific investments. Here's a quick look at the tax rules for second homes.
Mortgage interest. If you use the place as a second home -- rather than renting it out as a business property -- interest on the mortgage is deductible just as interest on the mortgage on your first home is. You can write off 100% of the interest you pay on up to $1 million of debt secured by your first and second homes and used to acquire or improve the properties. (That's a total of $1 million of debt, not $1 million on each home.) The rules that apply if you rent the place out are discussed later.
Property taxes. You can deduct property taxes on your second home, too. In fact, unlike the mortgage interest rule, you can deduct property taxes paid on any number of homes you own.
If you rent the home. Lots of second-home buyers rent their property part of the year to get others to help pay the bills. Very different tax rules apply depending on the breakdown between personal and rental use. If you rent the place out for 14 or fewer days during the year, you can pocket the cash tax-free. Even if you're charging $5,000 a week, the IRS doesn't want to hear about it. The house is considered a personal residence, so you deduct mortgage interest and property taxes just as you do for your principal home.
Rent for more than 14 days, though, and you must report all rental income. You also get to deduct rental expenses, and that gets complicated because you need to allocate costs between the time the property is used for personal purposes and the time it is rented. If you and your family use a beach house for 30 days during the year and it's rented for 120 days, 80% (120 divided by 150) of your mortgage interest and property taxes, insurance premiums, utilities and other costs would be rental expenses. The entire amount you pay a property manager would be deductible, too. And you could claim depreciation deductions based on 80% of the value of the house. If a house is worth $200,000 (not counting the value of the land) and you're depreciating 80%, a full year's depreciation deduction would be $5,800.
You can always deduct expenses up to the level of rental income you report. But what if costs exceed what you take in? Whether a loss can shelter other income depends on two things: how much you use the property yourself and how high your income is.
If you use the place more than 14 days, or more than 10% of the number of days it is rented -- whichever is more -- it is considered a personal residence and the loss can't be deducted. (But because it is a personal residence, the interest that doesn't count as a rental expense -- 20% in our example -- can be deducted as a personal expense.)
If you limit personal use to 14 days or 10%, the vacation home is considered a business and up to $25,000 in losses might be deductible each year. That's why lots of vacation homeowners hold down leisure use and spend lots of time "maintaining" the property. Fix-up days don't count as personal use. The tax savings from the loss (up to $7,000 a year if you're in the 28% tax bracket) help pay for the vacation home. Unfortunately, holding down personal use means forfeiting the write-off for the portion of mortgage interest that fails to qualify as either a rental or personal-residence expense.
We say such losses might be deductible because real estate losses are considered "passive losses" by the tax law. And, passive losses are generally not deductible. But, there's an exception that might protect you. If your adjusted gross income (AGI) is less than $100,000, up to $25,000 of such losses can be deducted each year to offset income such as your salary. (AGI is basically income before subtracting your exemptions and deductions.) As income rises between $100,000 and $150,000, however, that $25,000 allowance disappears. Passive losses you can't deduct can be stored up and used to offset taxable profit when you ultimately sell the vacation house.
Tax-free profit. Although the rule that allows home owners to take up to $500,000 of profit tax free applies only to your principal residence, there is a way to extend the break to your second home: Make it you principal residence before you sell. That's not as wacky as it might sound. Some retirees, for example, are selling the big family home and moving full time into what had been their vacation home. Once you live in that home for two years, up to $500,000 of profit can be tax free. (Any profit attributable to depreciation while you rented the place, though, would be taxable. Depreciation reduces your tax basis in the property and therefore increase profit dollar for dollar.)
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