Vacation purchases can work outOPEN HOUSE

We'll soon be in the vacation season, and many families will become motivated to purchase their own vacation (or second) home.

Considering today's prices of those second homes, a great deal of thought needs to focus on the financial aspects of making such a purchase. Making those added monthly payments may mean cutting back on other expenses -- less money spent on such things as dining out.

There are some unique financial advantages of acquiring a second home, such as tax advantages not available to any other form of investment. If it's in a favorite vacation area, perhaps on a lake or ocean coast, the property can provide the owner family with a getaway home that's much more cost-effective than shelling out large chunks of money for expensive hotels or resorts.

The owner also has the option to rent the property to other vacationers. This can sometimes cover all the ownership costs, or more. That added income, coupled with the property's appreciation in value, can generate a substantial portion of the owner's retirement savings fund.

The Internal Revenue Service has some rather complex rules on renting properties on a short-term basis. Deductions depend on a variety of factors so that should be checked out and considered.

Some families have creative ways to maximize their second home's income-producing capability. For example, they might sell their primary home and move into their second home for at least two years before selling it. That will qualify it as the family's primary residence, so when it is sold the owner could qualify to take up to $500,000 in tax-free profits (if it's jointly owned by a married couple), even though they took that same benefit when they sold their previous home.

Of course, a prospective buyer of a second home should consider downside factors like continuing maintenance and possible tenant problems. But an increasing number of families are deciding the personal and financial advantages of owning a second home outweigh the disadvantages.

Q: To what extent are home prices dropping?

A: Home prices will probably drop a bit this year for the first time in 38 years, according to a report from the National Association of Realtors. This is partially due to tighter lending standards being implemented by lenders and government agencies.

Median prices of existing homes are now projected to fall 0.7 percent this year before a 1.6 percent gain next year, NAR predicts. Since NAR began tracking prices of single-family existing homes in 1968, the smallest annual price gain was 2.0 percent in 2006. The average gain has been 6.5 percent.

The median sales price of new homes is expected to rise 0.4 percent this year, and 2 percent next year, NAR projects. "We still forecast this year to be the fourth-highest year on record for existing-home sales, and housing remains a great long-term investment," said David Lereah, senior vice president and chief economist of the National Associaton of Realtors.

"Simply stated, a loan with the lowest monthly payment probably isn't in your best interests. Borrowers need to understand worst-case scenarios. If you're in a mortgage you aren't comfortable with, now is the time to refinance, if you can, with historically low rates on safer conventional loans."

Lereah predicts the number of existing home sales to drop this year by 2.2 percent, and the number of new home sales to be down by 14.1 percent. New housing construction starts will be down by 18.4 percent, he noted.

Send inquiries to Jim Woodard, Copley News Service, P.O. Box 120190, San Diego, CA 92112-0190. Questions may be used in future columns; personal responses should not be expected.