If you’re taking out a mortgage to buy that second home, you can also deduct the interest on up to $750,000 of mortgage debt used to acquire your first and second homes or to improve those properties. (The new law reduced this from the previous limit of $1.1 million.)

If you plan to use your second home for only part of the year, during other periods you may want to rent it to other vacationers to help offset the costs of maintaining the property.  Be mindful that if you rent the home for more than 14 days of the year, you must report that income on your tax return.

1.  HOW YOU KNOW YOU’RE READY TO BUY A SECOND HOME

Two words: disposable income.  Put simply, you’ve got money to spend, and real estate is where you want to put it.  Aside from money, age is another factor you should consider when buying a second home as well as working from home.  Whatever your reasons, think this through so you don’t buy something that’s going to become a drain on your finances or something that you simply aren’t ready to tackle yet.

2.  How will this impact me financially?

Just because you have the money to spend doesn’t mean you should. Really consider the expenses of buying a second property and the ongoing financial commitments involved in maintaining it, such as property taxes and insurance. Also, talk to your tax professional about how a second home will impact your tax situation.

3.  Is it worth the money?

If you’re looking at a vacation home, think about how often you’ll use the property. The main question to ask yourself is, “Would I be able to use the place enough to warrant the extra money?” You need to look at the annual cost to see if you’ll use it enough to pay for it. Also, if it becomes too much, will you be able to get your money back?”

4.  Should I buy with others?

When buying a property that requires more than a few hours to visit, it may be worth sharing the financial burden with others, like friends or family.  But before you purchase property together, set ground rules and consult an attorney. Find out how to buy property with other people.

5.  THE COST TO YOU

Interest rates for second homes typically aren’t quite as low as they are for primary home mortgages, and you’ll likely need more than the standard 20% down payment.

You can write off mortgage interest on a second home loan — same as on a primary residence — up to a combined $750,000 for both residences.²

In a hot market, paying in cash can allow you to move swiftly to nab a home you want, so it might make sense to borrow against investments.  Weigh the pros and cons of different financing options, as well as how the additional outlay might affect your taxes.

Know how the purchase will affect you financially in the short and long term.  Talk with an accountant before purchasing.

6.  How much will I spend on a monthly basis?

Even if the house is a bargain, there are other costs involved, the mortgage, taxes, utilities, insurance, and maintenance costs and even homeowner association fees.  When buying a rental property, budget for added costs, such as marketing the home to potential renters, hiring a property manager and making repairs.

7.  Before you buy … call an advisor.  Tax considerations are only the tip of the iceberg in terms of ways that an advisor can provide valuable counsel about the home buying process.

Check out my Blog on the 5 things to know about buying a home under the new tax rules.

Image by Michelle Raponi from Pixabay