Thinking about Buying a Vacation Home Abroad? Read this First!

European Vacation HomeIt’s easy to fall in love with an overseas location you visit on vacation. If you find yourself visiting the same locality over and over, you may even decide that the purchase of a permanent vacation home is your next practical step.

 

But while your vacations may be relaxed and focused on fun, the purchase of a vacation home shouldn’t be. Before you contact your real estate lawyer and agent, think about some of the following points to make sure that it really is a step you want to take.

 
  • Think about your long-term plan. An article about overseas vacation homes in Wells Fargo Magazine suggests considering the purchase of a property that you want to own for at least 10 years. Real estate isn’t the most liquid of investments, especially in certain locations, and as recent years have shown us their values do not always go up. Therefore, a vacation home abroad should be thought of more as a long-term investment.
  • Consider your changing needs over the long term. The things that you enjoy doing now may not be activities you enjoy in 10 years. Likewise, changes in your health could create differing lifestyle needs than you currently have. When choosing a vacation home that you plan to retain for a while, keep the future in mind and when possible, try to choose a location that can fit a variety of health and lifestyle needs.
  • Think about the exchange rates. Not only can currency exchange rates make a house more affordable right now, they can also make it more difficult or less profitable to sell later. While taking advantage of a temporarily low exchange rate now might be ideal for buying the property, consider how the changing exchange rate would affect your future ability to sell. Likewise, an exchange rate that is higher now than usual could fall in the future creating a net loss upon resale.
  • Consider the possibility of renting instead. Home ownership abroad can be an expensive proposition, especially when you factor in the cost of maintaining a second home year round. A better option for some may be temporary, furnished rental apartments. Not only would this save you the cost of maintenance but it allows for some flexibility when you travel abroad.
  • Beware future tax obligations. When you sell a vacation home in another country, you may be subject to taxes within the foreign country and you’ll likely be expected to include the sale amount as income in your U.S. taxes. If the home you sell is not a temporary vacation home but bona fide residence then you may meet physical presence tests that allow you to exclude a certain amount of the income earned in a foreign location, so be sure that you understand the distinction.
  • Beware of current tax obligations. If you rent out your vacation home during the time you aren’t using it, you could be charged a tax in both the country the home is located in and the U.S. But that’s not where your tax obligations end; you’ll also likely be obligated to pay property taxes in the foreign location.
  • Buy the right insurance. Just as with your U.S. home, your international vacation home needs insurance. Home insurance will protect it against fire, theft, vandalism and other perils. Flood insurance will protect it from those instances classified as floods that are not covered by home insurance. Remember that many policies will exclude certain perils, such as earth movement, which means you may need to secure separate insurance to cover them. Finally, you also need to explore your options for international health insurance plans that cover you while you visit your vacation home. Without one of the many available international health insurance plans, you could end up with high treatment bills, emergency evacuation costs and other treatment-related financial pitfalls while you vacation abroad.
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For some, the purchase of a vacation home is a wonderful way to pledge a long-term commitment to a vacation spot. For others, the level of risk, expense, and responsibility it brings in creates a tension that impacts the joy and relaxation once offered by the area. Hopefully, by giving it lots of thought and considering all the angles, you can make a decision you don’t regret.

 

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