Let's dream for a minute. If you had all the money you could possibly need, where would you live?
For me, it's simple: all over the place. I'd want a place in the Southern Hemisphere, for sailing, swimming and cycling in February. Then there would be a place in Maine or Idaho, and a swank apartment in some sophisticated city.
All this isn't likely to happen, of course. But what about a bungalow at the Jersey Shore or a condo in Florida? Either is possible. Indeed, for millions of American families, owning a vacation home is within financial reach especially with mortgage rates at breathtaking lows.
But does it make sense?
Financially, you can make a case for investing in a second home, but it's a stretch. Ultimately, the decision usually swings on nonfinancial issues.
Tax savings and rental income make vacation homes look like appealing investments. Regardless of whether the property is rented out, mortgage interest and property tax payments for a second home are deductible on the owner's federal tax return, just as they are with a primary residence.
Rental income also can shave the owner's costs. Of course, you can get the highest rents only in the prime season, when you probably want to use the place yourself.
Rent the house for fewer than 15 days a year and you need not report the rental income making it, in effect, tax free. You would not be able to deduct any rental expenses, though.
If you rent the property for 15 days or more, the cleaning, maintenance and other business expenses may be deducted on your federal return. But use the property yourself for 15 days or more and the deductions cannot exceed the rental income.
There might even be a deduction for depreciation, just as a corporation depreciates a factory.
These are just the high points, of course; the tax issues are tricky enough that you should consult an accountant before taking the plunge.
Tax savings and rental income aren't the only alluring financial draws. Many people hope to profit from rising property values as well. Indeed, prices are soaring in many prime vacation spots.
But beware: Big investment gains often are elusive.
First, there are unexpected expenses the new air conditioning system, roof or paint job. Even if your situation makes them tax-deductible, that just shaves a little off the outlay. Every expense represents "opportunity cost," which is money that could be invested elsewhere but isn't.
Subtract a 6 percent Realtor's commission from the sale proceeds and it's even harder to break even.
If investment gains are your goal, there are better ways to play the real estate market.
First, consider your main home. A married couple pay no tax on profits as large as $500,000 on the sale of a primary residence, while there is no such tax exemption for profits on a second property. That means it would make better financial sense to improve your main home or buy a more expensive one. A single person can take $250,000 in profit on a home tax-free.
Another way to invest in property is with real estate investment trusts, or REITs. These are like mutual funds that own property rather than stocks or bonds.
Decide you want to unload your real estate investments and you can be out of your REITs by the end of the day; dumping a second home can take months.
With a REIT, a professional manager takes on the headaches. With a vacation home, you do or you shoulder additional expense of hiring a property manager to wrestle with tenants and repairmen.
Lots of people, I'm sure, are in love with their vacation homes, but not because they're making money on them.
Buying a second home makes sense only if it's where you want to spend your vacations.
For me, this is the biggest drawback.
I don't want to go to the same spot year after year. And I certainly don't want to deal with renters, or give up weekends in the spring to get the place ready for the season.
For me, vacationing is all about letting someone else face the work and worry.