3 Things to Know Before Buying a Second Home

Like many people, you may wonder if owning a second home or vacation property is a good strategy
for adding real estate to your investment portfolio. Owning a second home can be an effective way to diversify your
assets, generate income, and build equity. However, like any investment, it’s not without risk. If you’re thinking
about buying a vacation property or other real estate, take a few moments to consider the three questions below.

1. Does adding real estate to your investment portfolio align with your
financial plan?

Adding real estate to your investment portfolio can be a great way to diversify your income
sources and assets. However, since different real estate investments provide different benefits and risks, it’s
important to determine your overall goals before adding real estate to your investment portfolio. Are you seeking
additional income, a way to further reduce taxes on current income, a hedge against stock market risk, a retreat to
enjoy with family and friends, or a combination of these?

You also want to consider whether an active or passive approach to managing real estate assets is
right for you. For example, if you’re seeking additional tax benefits to offset your income by adding real estate to
your investment portfolio, but don’t want to take an active role in managing a property, such as a beach or lake
house, you may want to consider publicly traded real estate investment trusts (REITs) or funds that invest in real
estate.¹ These methods allow you to add real estate to your investment portfolio without having to commit
a lot of money upfront or actively manage any properties.

2. What are the potential financial benefits and risks of investing in a
second home?

Most people buy a vacation home with the expectation that it will appreciate over time and/or
provide an income stream as a rental property. While these benefits can prove lucrative, adding real estate to your
investment portfolio is never without risk. For example, if real estate prices are high in the location where you
intend to buy, you may have to pay top dollar for the property you want. In addition, expenses including mortgage
payments, property taxes, insurance, utilities, maintenance costs, and homeowner’s association fees can add up
quickly. You’ll also need to plan for unexpected expenses, such as weather-related events or damage from renters.

On the other hand, if you frequently visit the same destination for family vacations, adding real
estate to your investment portfolio through ownership of a vacation property may provide a satisfying return on
investment vs. renting someone else’s property.

While potential tax benefits, income generation, and appreciation can make owning a vacation home
very attractive, it’s important that the downpayment and cost-to-carry a second property don’t have an adverse
impact on your cash flow but, instead, align with your budget and long-term financial plan. In other words, you
don’t want to create a situation where adding real estate to your investment portfolio renders you cash poor or
jeopardizes your ability to achieve other important lifestyle goals.

3. What are the tax implications of adding real estate to your investment
portfolio?

In general, you may be able to deduct certain expenses associated with adding real estate to your
investment portfolio through ownership of a second home. If the property is considered a personal residence, you may
be able to deduct some or all of your mortgage interest for the tax year if you use the home for more than 14 days
or 10% of the days that you rent it out, whichever is greater. When you consider adding real estate to your
investment portfolio, be aware that if your second home is considered a rental/investment property, you’ll need to
report any rental income to the IRS if you rent your home for more than 15 days per year and your personal use of
the property does not exceed 14 days per year or 10% of the number of days the home was rented. In this case, you
can deduct expenses for the rental, including maintenance and utilities.

If you own two houses, as a result of adding real estate to your investment portfolio, and both
are strictly for personal use, you will likely owe two sets of property taxes. It’s important to understand that
under the Tax Cuts and Jobs Act of 2017, there’s a $10,000 limit ($5,000 if married filing separately) for state and
local taxes paid, which includes property taxes. This $10,000 maximum could limit your ability to take a deduction
for property taxes on your first and second homes. However, if the second home is considered a rental/investment
property, you would have the ability to deduct all or a portion of the property tax without the $10,000
limitation.²

Another tax issue to know about before adding real estate to your investment portfolio is the
ability to deduct mortgage interest. For homes purchased after December 15, 2017, you can deduct the mortgage
interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary and/or a second
home. (If you are married filing separately, the limit drops to $375,000.) So it’s not hard to reach this limit
where the combined mortgage debt on your primary and vacation homes exceeds $750,000. There are other criteria that
must be met to qualify for the mortgage deduction as well.

Before adding real estate to your investment portfolio, keep in mind that tax rules are
complicated and may differ depending on your specific situation and the location of your home. Take time to meet
with a qualified tax professional well in advance of purchasing a second home.

At Return on Life® Wealth Partners, our tax and wealth planning professionals can help you develop
a tailored strategy for adding real estate to your investment portfolio. For more on this topic, be sure to listen
to my latest podcast episode of Frank Wealth Insights. To learn how we can help you and your family pursue the
Return on Life® you desire, contact
us today for a free consultation.

About Return on Life® Wealth Partners

Return on Life Wealth Partners is an independent Registered Investment Advisor (RIA) founded in
1994, with headquarters in Cleveland. The team provides comprehensive wealth planning services to individuals,
families, and business owners. By examining clients’ lives before their money, Return on Life® aligns its advice
with clients’ values. With access to its Complete Family Office (CFO)ˢᴹ and Personal CFO™ services, Return on Life®
Wealth Partners aims to help clients achieve the milestones that matter most to them. This personalized approach
also extends to the institutional and corporate retirement plan services available through 401(k) Prosperity®.

¹ Investing in REITs involves a high degree of risk. Some, but not all, of the risks
and uncertainties that an investor can expect are risks related to: acquiring, owning and selling real property and
real estate investments, including risks related to general economic and real estate market conditions, the risk
that the REIT’s properties become too concentrated (whether by geography, sector or by tenant mix) and the risk that
the sales price of a property might differ from its estimated or appraised value; property valuations, including the
fact that the REIT’s appraisals are generally obtained on a quarterly basis and there may be periods in between
appraisals of a property during which the value attributed to the property for purposes of the REIT’s daily
accumulation unit value may be more or less than the actual realizable value of the property, etc. This summary of
risks does not address all the risks an investor may experience. Additional discussion of the risks can be found in
the “Risk Factors” section of the REIT’s prospectus.

² Publication 527: Residential Rental Property, https://www.irs.gov/pub/irs-pdf/p527.pdf

This information is not intended to be a substitute for specific individualized tax or legal
advice. We suggest that you discuss your specific tax or legal issues with your qualified advisors.

The opinions expressed and material provided are for general information purposes only.

Investment advice offered through Planned Financial Services, LLC, a Registered Investment
Advisor. Copyright © 2024 Planned Financial Services. All Rights Reserved.