The Internal Revenue Service has released tips for taxpayers regarding capital gains exclusion that is allowed for the sale of their primary residence. Home sales should meet the ownership use criteria. "When the home sale does not meet test requirements, a taxpayer may be allowed to exclude a reduced maximum amount of the gain if he sold the home due to health, a change in place of employment, or other unforeseen circumstances. The "unforeseen circumstances" are for example, divorce, natural disasters resulting in a casualty to the taxpayer's home, or an involuntary conversion of the taxpayer's home."

The IRS also states to homeowners that origination or points paid on a refinanced mortgage are deducted over the life of the loan, except if some of the money was used to finance improvements. The origination paid may be fully deductible in the year the points were paid.

To learn more about home mortgage interest, please visit: irs.gov/publications/p936
see (IRS TAX TIP 2006-55)

The number of second homes bought in the US has increased over 100% in the last 5 years. According to National Association of Realtors, there were 405,000 second homes reported in the year 2000 and buy 2005, there were at least 881,000, second homes reported. According. The second home boom was driven by record low interest rates, and expanded guidelines for second mortgages. The refinance boom coincided with the real estate boom. Investment opportunities sprouted across the country, as first time homeownership grew to an all-time high.

NAR released data supporting the idea that "Baby Boomers" were looking for second homes as investments. "But the report also indicated that many homeowners sold their primary residence home, but did not always purchase larger more expensive homes as they did in the past when the capital gains law required them to roll over the gain into their new home."

In 1997, the tax law was amended and now permits homeowners to exclude $500,000 (married couples) or $250,000 from the capital gain on the sale of their home. Chung's study shows that many choose to buy a smaller home and make a down payment on a second home that they will use for either vacation or investment purposes.

Another interesting fact is that the average annual income for Second home buyers is over $100,000 a year. That's over 40% more income earned per year by the average homeowner nationwide. NAR also reported that 45% of 2nd home buyers used savings to purchase the 2nd home, but nearly 30% of these homebuyers financed equity from a previous home with a home equity line or second mortgage.

Vacation destination states like Arizona, California, Florida and Hawaii experienced a huge surge in 2nd home purchases. Home Equity Financing for second homes in Nevada decreased by 284% between 2011 & 2012.

Despite mortgage rates hitting a four-year peak, nearly 70% of owners of homes worth more than $1 million either own second homes or are considering buying them, says a Coldwell Banker Previews Survey.

Jim Gillespie, CEO of Coldwell Banker Real Estate Corp. says, "This market is hot because 43 percent of these people make over $500,000, & 70 % said that interest rates had no bearing on their purchases and no bearing on some of the leisure things they do." In a recent article Lynn Adler says, in most cases, these homebuyers are younger baby boomers. The second home purchases have been investment properties or family use or for investment.

Coldwell Banker last year sold about $56 billion of homes worth at least $1 million, up from $35 billion in 2004 and $23 billion in 2003.

Occupancy is imperative when defining a second home status. Owner Occupied 2nd homes or vacation homes are considered to be less risky than Non Owner Occupied investment properties with lenders. Lenders usually will not consider the property a second home, if it is located less than fifty miles from your primary residence.

If you do not have the cash to put down on a second home, but have equity in your primary residence or other property you could utilize it in purchasing your investment property through a home equity loan or 2nd mortgage, and refinancing your current mortgage. Twenty-eight percent of investors with an investment property mortgage used their primary residences to procure down payment funds and you may be able to do the same. If you have not taken advantage of the lower rates since you purchased your primary residence, mortgage financing is something you should consider immediately while the rates are still low even if you are not looking at an investment.