What to know before you buy a Lake House
I have so many cherished memories of spending summers at my Uncle Bob’s lake house when I was younger. Family members from across the country would travel to central Pennsylvania to join us for a week of water skiing and canoeing on the lake. We spent our time playing games, sharing stories, and relaxing on the large wrap-around deck.
If owning a lake house to host friends and families has always been a dream of yours, here are five things to know before making the purchase.
1) Purpose of your Lake House
The first thing to decide is whether your lake house will be a Vacation Home or Investment Property. Some lake houses are a combination of both.
Vacation Home – A second home you live in during part of the year, purchased for personal use/enjoyment.
Investment Property – Real Estate purchased with the goal of generating income.
For the IRS to consider your lake house a personal residence, you need to use the home for more than 14 days, or 10% of the days that you rent it out, whichever is greater. For example, if you rent out the house for 26 weeks (182 days), you would need to personally use the home for more than 18 days throughout the year.
How you plan to use your lake house will have implications on the financing as well as taxes of your additional property.
2) Lake House mortgage considerations
A second home loan differs from that used for a primary home or investment property, mostly because each property type represents a different level of risk to the lender.
For a second home loan, there are several underwriting requirements including: single-unit property (such as single-family house, condo, or townhouse), not professionally managed, and must be at least 50 miles from your primary residence.
Lender qualifications for a second home loan may include having a higher down payment, credit score, and debt-to-income ratio. According to themortgagereports.com, unlike investment properties, you cannot use future rental income on a personal use property to calculate your debt-to-income ratio.
3) Tax implications
If your lake house will be used for personal use only, you can deduct the same expenses as with your primary residence: property taxes and mortgage interest. Mortgage interest up to $750,000 can be deducted if you are single or married filing jointly (IRS). If you intend to spend time working remotely while at the lake, you may also be able to deduct home office expenses if you meet certain criteria (Turbo Tax).
Before deciding exactly what lake you want to live on, review this interactive map from the Tax Foundation that displays property tax by location, which can vary significantly between counties and states across the country.
1) Impact to estate plan
There are several considerations that go into how to title and structure the ownership of your lake house. If you want to pass along the property to loved ones, make sure you’re asking this question. Can your beneficiaries afford to maintain the lake house in the future, including taxes and maintenance expenses? If the answer is yes, here are some options to discuss with your estate planning team.
Gift a portion of the property each year. In 2024, the federal annual gift tax exemption is $18,000 (for married couples it is $18,000 each, for a total of $36,000). Parents can gift portions of their property up to the federal annual limit over a number of years. If the parents pass on before the entire property is gifted, the rest is included in the taxable estate.
Place your lake house in a revocable trust. This allows you to name your beneficiaries but retain full control. Upon death, the living trust automatically converts to an irrevocable trust.
Establish a Qualified Personal Residence Trust (QPRT). One of the biggest benefits of a QPRT is that it effectively removes the value of your second home and all future appreciation from your taxable estate. A QPRT is irrevocable, which means it cannot be amended and all decisions about the property will be made by a designated trustee who will need to be outside the immediate family.
Remember, property left to someone in a will must go through probate, a lengthy legal process, and may face estate taxes.
2) Access to medical care and ease of travel
It’s important to make sure you have the best possible medical care close to home. This is often an overlooked consideration when dreaming of living in a remote location at the lake. It is especially critical if you have a medical condition that requires ongoing attention.
The good news is, if you are 65 and older and enrolled in original Medicare, you will be covered in any state. If you are not 65 yet or if you are covered by individual health insurance, be sure to review the terms of your coverage and types of costs you might incur while you’re away at your second home. Most insurance plans have in-network coverage that varies from emergency care. This is also an important consideration for friends and family coming to visit.
Speaking of visitors, when considering the location of your lake house, evaluate the ease of traveling to and from the property. Would you like to have access to a major highway or airport? Will you have any concerns traveling through inclement weather to reach your destination?
Owning a lake house can offer many valuable benefits including an enjoyable retirement lifestyle, a sound financial strategy, and a destination for friends and family to make a lifetime of memories. Before purchasing your dream home on the water, please contact me, or your financial planning professional to discuss the impact of this asset to your overall financial plan.
https://themortgagereports.com/21116/second-home-mortgage-qualify-for-vacation-residence