Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SUNDAY, August 1, 1993                   TAG: 9308010041
SECTION: MONEY                    PAGE: 6   EDITION: METRO 
SOURCE: MAG POFF STAFF WRITER
DATELINE:                                 LENGTH: Medium

OWNING VACATION HOME ISN'T JUST FUN AND GAMES

If your daydreams are about to materialize, you face slightly different rules for financing that second home.

And you must think in advance how you will use that property because the tax rules depend on your decision.

When it comes to buying, the first question, of course, is whether you have the income to finance both your primary residence and the second home.

Many people in the Roanoke area do shoulder that double burden, according to H. Michael Hincker, local manager for Mortgage Service America.

Roanokers' most popular choices for a second home by far are Smith Mountain Lake and Wintergreen, he reported.

Lenders take a harder look at applications for a second home, however. That's because people who take strong measures to keep up payments on a main house may be more willing to default on a vacation cottage.

No FHA or VA financing is available for a second house, Hincker said, and he's never seen an offer for financing as much as 95 percent of the cost.

Some mortgage companies require 20 to 25 percent down, financing 80 or 75 percent of the purchase. Hincker's company and others will finance 90 percent, but they charge discount points over 80 percent. With each discount point equal to 1 percent of the loan, the up-front fee is often a way to help a mortgage company sell the loan to secondary lenders.

A few lenders, he said, charge extra points for second homes regardless of the deal.

Hincker advised people to shop carefully for financing. He said anyone who can put a downpayment of 20 percent on a second home should be able to get the same financing and points as for a first residence.

Valerie Kowalski, a certified public accountant with the Roanoke firm of Kowalski & Associates, said a second home may be used entirely for personal use or rented for part of the year.

A second residence under tax law, she pointed out, can be a house, condominium, mobile home, boat or house trailer so long as it includes sleeping space, a toilet and cooking facilities.

A time-share property may also qualify for special tax treatment, she said, but a person can own only one second home at a time.

If the home is used solely for personal use, Kowalski said, the owner may deduct the property taxes and mortgage interest just as he would for a primary residence.

She said personal use includes occupancy by an owner, spouse, sibling, ancestor or descendant. It also covers an individual who rents at less than fair market value or a person such as a house-sitter employed for the owner's convenience.

Kowalski said some limitations apply if the property is both a rental and personal residence:

If the property is used personally less than the greater of 15 days or 10 percent of the days it is rented at fair market value, expenses are allocated between the personal and rental portions.

The personal use portion of mortgage interest is treated as personal interest and may not be deducted as mortgage interest. Property taxes and other expenses are allocated between personal and rental use.

If the property is used personally more than the greater of 14 days or 10 percent of the days rented at fair market value, and the property is rented less than 15 days, the mortgage interest is deductible subject to the same limitations as the owner's primary residence. Property taxes are fully deductible as itemized deductions, and other expenses are not deductible. The owner is not taxed on any of the rental income.

If the property is used personally more than the greater of 14 days or 10 percent of the days rented at fair market value, and the property is rented for more than 14 days, mortgage interest, property taxes and other expenses are allocated between personal and rental use. The owner may not deduct other expenses (such as depreciation, maintenance and repairs) to offset income other than that derived from rental income.

Kowalski said qualified mortgage interest limitations and passive activity loss limitations apply to the second home.