Realty Times May 9, 2000

Grown-Up Boomers Buying Second Homes
by Broderick Perkins

Cashing in on favorable tax laws, a booming economy, and more affordable financing, aging baby boomers are creating a boomlet in the second home market.

Last year, buyers purchased 377,000 single-family second-homes, up 9.3 percent from 1997 and a whopping 27.4 percent since 1995 when there were 296,000 second home sales, according to the National Association of Realtors' biennial Buyer and Seller Survey, released May 9.

Buyers looking to second homes to open the door to the good life are finding it easier than years ago, but a second home purchase comes with the same caveats you'll face buying your first home -- and more.

NAR credits the Taxpayer Relief Act of 1997, in part, for increases in second home sales. Second home purchases surged 16.6 percent in 1997 alone.

The tax law permits married taxpayers who file jointly to keep, tax free, up to $500,000 in profits on the sale of their principal residence provided they've lived there two of the prior five years. The same benefits are attached to your second home, provided you live two of the five years and and sell only one home during any two-year period, says Marie Sternberger, an enrolled agent in Sunnyvale, CA.

Seventy-nine percent of second home buyers are married couples, according to the NAR survey.

Demographics are boosting second home demand.

NAR's survey says the median age of second-home buyers in 1999 was 43. Aging boomers -- those most likely to purchase a second home -- are currently reaping the income and home equity benefits generated by the nation's longest economic expansion on record. The leading edge of aging baby boomers is just now creating a demographic bulge passing through the population.

Recreational investments

As more boomers age, experienced with up and down economies, they are also looking to diversify portfolios by moving some equity into real estate as a more tangible asset.

"Not only can you earn income from renting your property, but like stocks, real estate generally appreciates in value quite handsomely over the years," says personal finance counselor Eric Tyson, author of "Investing for Dummies" (IDG Books, $19.99).

"The appreciation of your property compounds tax-deferred during your years of ownership. You don't pay tax on this profit until you sell your property -- and even then you can roll over your gain into another investment property and avoid paying taxes," said Tyson, also author of "Personal Finance for Dummies" (IDG Books, $19.99).

Such an investment is even more attractive thanks to recent, relatively low interest rates and second home financing programs that are competitive with first home loans, according to NAR.

NAR also found:

  • The top five states for second homes are California, Florida, Texas, New York and Pennsylvania.

  • Half of all second homes are purchased for recreational use. Most of the rest are investment properties.

  • Typical recreational homes aren't necessarily million-dollar mansions or half million dollar condos in resort areas, but smaller, less expensive beach houses, cottages, cabins and chalets often in seaside, lakeshore and mountain areas.

  • Most vacation homeowners prefer to be within a relatively short drive (less than a day). Half of all vacation homes are located in rural areas; only 10 percent are located in central cities.

    Second home purchase tips

    Unfortunately, second home purchases require even greater care than buying your first home.

    According to NAR's study, second home values don't appreciate as well as first home values. The median price of a second home in 1999 was $127,800, up only a bit from $124,800 in 1997. The median price for a first home increased much more from $126,200 in 1997 to $138,800 in 1999.

  • Shop for a second home as you would shop for any home -- seek an asset with appreciation potential and future marketability.

  • Get to know the area. Hire a REALTOR® intimately familiar with the community, its amenities and resources. Consider first renting in the area from time to time to get to know the neighborhood. That will also let you know if your second home will be too distant to enjoy.

  • Use mortgage lenders and brokers who work the area. They know the market and can price competitively. Seller financing may be available from older owners who own properties outright and are willing to carry a mortgage for the extra income. Co-ownership, say with another family, is another financing option, provided the deal includes a carefully worded contract with shared-use and property-disposal provisions.

  • Don't count on rental income from the property to help you pay the mortgage unless the property is highly desirable in a popular destination. Tax-wise, renting can be tricky. You can rent your second home for any amount, tax free, for 14 days or less in any calendar year. Once you rent the property for 15 days or more, however, it becomes an investment property and a complex set of rules apply based on the the housing type and how often you rent it, according to Sternberger.

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