A vacation home can have drawbacks.

You and your family like to get away.

Buying a vacation home seemed like a great idea.

Your children could inherit it.

You may even be able to rent it out together.

According to a recent Barron’s article titled “What Retirees Should Know Before Buying a Vacation Home,” a vacation home can also bring complications and expenses.

Think carefully before purchasing a vacation home.

For starters, a vacation home can be costly.

You will pay for maintenance, taxes, and may even find it necessary to hire a rental-management company.

Also, the value of real estate is not predictable.

You may not be able to get the price you want if you need to liquidate it for cash.

As a retired individual, income is fixed.

Consider whether you can financially weather surprise costs that will inevitably come up when you own a vacation home.

If you have enough in your nest egg for your ongoing lifestyle and would not need to sell in the future, a vacation home could be an good move.

If you do purchase the home, it would be wise to invest in a person or company to manage the property.

Why?

Vacant homes are targets for vandals and thieves.

Unknown maintenance issues can worsen and become more expensive than simple upkeep costs.

Another consideration before purchasing the home is the taxes you will owe if you sell the property.

Capital gains tax exemptions do not apply to a second residence.

The exemption only applies to a primary residence in which you live for at least two of the last five years.

For married couples, the exemption is up to $500,000.

You may find a way around this.

If you move from the primary residence to the vacation home for two years, you can then sell the house and move somewhere else.

Renting the property brings other considerations.

You can only rent a property up to 14 days without owing taxes.

After 14 days, you will be required to pay taxes; however, some rental expenses will be tax deductible.

If you do not plan to sell the house but leave it to your heirs, you can include it in your estate plan.

You should discuss this with your children in advance to make sure they are all willing and able to afford its upkeep.

You may choose to place the home in a limited liability company.

If you do this, you can give the children a share of the entity holding the vacation home.

Work with an experienced estate planning attorney to discuss your options.

As for the Krull family, we are fans of Airbnb.

Reference: Barron’s (Jan. 18, 2020) “What Retirees Should Know Before Buying a Vacation Home”