Excerpted from How a Second Home Can Be Your Best Investment
by Tom Kelly and John Tuccillo

Millions of homeowners dream of owning a second home, for pleasure and profit, but they aren't sure they can afford it. Many who do own a second home are concerned that Uncle Sam will strangle them for selling it. Others are attempting to untangle the dilemma of being property rich and cash poor. Fortunately, there are now solutions to these three problems.

Let's explain the simple strategy that will enable your next real estate purchase––whether for investment, vacation, or retirement––to serve all three of these purposes over time, tax free. We call this concept of tax-free lifetime homeownership “The New Second Home.” In addition, if you already own a traditional second home or homes, or rental property, this chapter also charts your course to greater equity, tax savings, and additional leisure time in the place you really want to be. “Best purchase’’ no longer denotes only cherished family times––The New Second Home can become a huge, flexible, and versatile moneymaking, tax-saving asset.

The New Second Home Strategy is never limited by an owner’s age or the location, or type, of property. Its goal is to provide you with a creative, new approach to obtaining the traditional second home. While we offer several different temporary and permanent twists, phases, combinations, and options (Interim, Cocoon, and Ultimate) here’s the New Second Home Strategy in the simplest of forms:

1. Buy a rental property in the area you think you want to retire/get away. (Perhaps the down payment comes from a home equity loan on your primary residence).
2. For most of the year, rent it out––renters pay down your mortgage. Enjoy some personal-use days and get to know the area.
3. Sell your primary residence, collecting up to $500,000 tax free.
4. Move in to the getaway/retirement rental and deem it a personal primary residence. Make it cozy for your long-term comfort or wait two years and sell it to pocket another tax-free gain.

Building Ownership Through a Series of Properties
The New Second Home can also be a long-term tax shelter for future retirement. For example, if you are 35 years old and plan to slow down at 50, you can buy a rental home disguised as vacation home, furnish it, enjoy some personal-use time and have renters pay for it (Interim Phase). When you have whittled every shred of tax depreciation advantage out of it, you can move in and convert it to a full-time private residence (Cocoon Phase) while still renting it out a couple of weeks a year. And because most mortgages 'front-loan' interest, you will have used up most of your tax deductions from the mortgage in the 15 years you were working and renting the home. In the later years of the mortgage, when interest deductions are relatively low, you probably will be less concerned about your income falling off because you have promised yourself to slow down at age 50. While future tax proposals undoubtedly will change the current tax landscape, second homes still will be in direct sunshine when compared to other proposed restrictions on real-estate investments. You can sell your primary residence, pocket the gain, and retire in your second home (Ultimate Phase).

Read more about second home investment strategies in Tom Kelly’s book How a Second Home Can Be Your Best Investment.

About the Author:Tom Kelly is a real estate columnist and radio show host with 33 years of experience as a professional journalist. Tom also authored five books focusing on second homes, mortgage options and retirement possibilities. He targets Baby Boomers and Retirees, providing consumer tips and helpful hints as well as explaining concepts and terms in a friendly, understandable style. His award-winning and nationally syndicated radio show "Real Estate Today’ provides on-air advice to callers. Learn more about Tom.