Purchasing Land For A Second Home Seek Advice

BUYERS LOOKING TO PURCHASE a second home—especially a retreat in a resort area—often approach the process as a chance to really express themselves, even more so than in the purchase of a primary residence. While remodeling an existing house provides ample opportunity to let one’s personality come shining through, many buyers want to start from scratch. They will only consider a parcel of land that has nothing but nature’s imprint upon it, so that the dream home they build is theirs and theirs alone, overlooking a view that they chose as carefully as the home they helped design. As appealing as this sounds—and as rewarding as it can indeed be—such buyers need to know about and understand the sometimes harsh realities that can creep into, threaten and alter their dream.

Certainly many of the issues and challenge buyers purchasing land for a resort or second home will also present themselves in the purchase of such a home itself, whether existing or new construction. Lifestyle preferences, rental regulations, restrictive covenants; buyers will be confronted with all sorts of decisions and options in the purchase process of them both. But there’s one big difference between these two types of transactions: As obvious as it is, unimproved land doesn’t have anything on it yet, and the effects of this difference can have huge ramifications. Unfortunately, if you’re not careful or know what you’re doing these complications don’t become obvious until after it’s too late.

Put most simply, zoning and environmental regulations are getting stricter across the country, and buyers need to know this from the very start. Though there is still great variation in what is permissible from county to county and state to state, it’s pretty safe to say that just because a home has already been constructed on one parcel of land that doesn’t mean the same house can be built again on a different parcel nearby—or even rebuilt on the same parcel for that matter. It’s easy to get disappointed. You might find inspiration in a home only to discover that features that make it so appealing can no longer be built. That’s why, to help you both manage your expectations and guide you through the search for land and the transaction, it’s especially important to find a seasoned real estate professional who knows the area, one who understands and stays informed about the local, state and federal zoning, construction and environmental regulations that affect what you can and cannot make of the dream home you want to build on the one of the parcels of land you tour. (Even buyers with the intention remodeling the home they purchase also need to be aware of how these constraints will affect them.)

That said, it’s just important for you to “go to school” about those regulations yourself. In general, they fall into two types: environmental and “man-made.” Environmental policies dictate things like water use and waste system specifications and location. Knowing a little geology will help in this arena. A broad understanding of such things as the local water table, soil types and their percolation rates will help you comprehend why these regulations were established in the first place and have to be enforced. Man-made regulations, on the other hand, are policies that are in place to establish or maintain the area’s look, atmosphere and appeal—the very things that make it desirable in the first place. These include the same things mentioned above that also confront buyers of existing homes, in addition to regulations dictating building materials and design considerations. They can, however, be in effect for other reasons, too. Zoning calculations for the percentage of the parcel’s total area a home can cover might be dictated by water runoff; a home’s setback from the lot lines could be determined by its proximity to roads.

It all becomes very involved and complicated, with different governmental bodies each having jurisdiction on what can and cannot be built on a parcel of land. The local body will have its own regulations, but if the parcel has lake, river or stream frontage it could be subject to further restrictions by the state Department of Natural Resources, and perhaps by federal regulations under the Clean Water Act and possibly navigable waters regulations. Even the Highway Departments could have impact, establishing the set back of any structure built on a parcel with road frontage. The point is that it’s a bureaucratic jungle out there, and to negotiate it helps to have—at the very least—a broad understanding of the issues so you'll know where to find help when you need specific answers.

Of course, understanding the “whys” of what can be built on a parcel of land is only half the equation; you also need to understand the “how.” Just as a basic understanding of zoning and environmental regulations will save you grief and disappointment, a familiarity with the entire building permit process—all the hoops to be jumped through and a realistic timetable for approval—will also make the process seem smoother. For this reason, timing becomes a much more important factor in the purchase of land for a second home than the purchase of a home that already exists. Environmental regulations and zoning codes are always in flux, making what is permissible to build now impermissible down the road. Investment buyers, or those who don’t plan to build right after closing the property purchase, need to be especially careful since home plans that would comply with existing regulations at closing might no longer comply when you decide to begin construction.

That’s why Wade Hanson, former broker-owner of Leach Lake Realty of Walker, Minnesota and now COO of http://Lakeplace.com in Richfield, Minnesota, advises his land buyers to start the building permit process immediately after closing. “I recommend that land buyers find a builder before they even start shopping for land,” he says. With a builder who understands what they want in a home, buyers have a resource they can tap after they’ve selected potential properties to build on. “A quality builder should be able to examine a site and determine if he can construct the kind of home the buyers have discussed and even identify potential challenges in the project,” Hanson explains, “much in the same way a home inspector identifies potential problems in an existing home.”

All that’s important, but it may come down to finding the right real estate professional to help you. Buying land has its unique aspects, so find an agent who’s not only familiar with the area and its regulations but also has expertise in land brokerage, such as one who has earned the Accredited Land Consultant designation. Awarded by the REALTORS® Land Institute, ALC-designated agents have taken specialized training about land and its purchase to help you through the transaction.

Solving the unique geological and environmental challenges presented by a parcel of land is the key to laying a solid foundation for a home built upon it. Similarly, basic knowledge about zoning and environmental regulations, and the building permit process, is the solid foundation you need in your search for the land upon which to build your home. This will help you understand and reconcile yourself to the constraints and limitations—both natural and man-made—that can be placed upon what you’re able to build on the parcel of land you choose. There’s no guarantee that there won’t be any unanticipated challenges, but with a clear view of the land purchase process, the vista from your new home won’t be obstructed by memories of unexpected hardships and compromises you had to make because of the parcel of land you purchased.

Sidebar: Does Your Second-Home Purchase Add Up to 1031?
Check the Facts, Do the Math
The purchase of a second home or resort property is often preceded by the divestment of another property. What if these two transactions could be combined into a single transaction and in the process the payment of any capital gains taxes could be deferred? This may sound like too-good-to-be-true slight-of-hand, but that’s exactly what the Internal Revenue Service allows under Section 1031 of the Internal Revenue Tax Code, through something called a like-kind exchange. It works like this.

First, and probably most importantly, both the “relinquished property” and the “replacement property” must be held for investment or business purposes. Primary personal residences do not qualify, but since many resort and second-home properties are investments, as well as for personal use, that beachfront condo in Florida you want to sell to purchase a house on the Intra-coastal could make the grade. There’s a catch, though: the 14-Day Rule. Under it, a property is considered a personal residence if it was owner-occupied more than 14 days or ten percent of the total days it was rented at fair market rates during the year, whichever is greater. Allowances are made for days you spend on repair and maintenance, but the rule also applies to occupancy by family members, below-market rentals and to any arrangement where you gain use of another property.

Next, the transferred properties must be “like kind,” though within the context of Section 1031, any real property held for investment or business purposes qualifies. And while the replacement property does not have to be acquired at the same time that title of the relinquished property is transferred, it does need to be identified within 45 days and the exchange, including title transfer, must be completed within 180 days, or by the time the return for the tax-year of the exchange has to be filed.

It sounds pretty simple—and at its core that is the beauty of 1031 exchanges—but these are just the basics. There are strict rules that must be followed to reap the benefits, as well as avoid any penalties. Other factors can also affect the transaction. For instance, the replacement property must be held for five years and any “boot”—cash or unlike property received in the exchange above and beyond the real property—is deemed taxable gain, levied at it’s fair market value.

The entire process requires a team of specialists, accountants, attorneys, real estate professionals. But not only can they help you understand the basic rules governing 1031 real property exchanges and guide you through the transaction, they also recognize when 1031 exchanges create tax-saving opportunities. The situation can vary greatly. Diversification, estate planning, relocation, financial strategies, life style changes, consolidation, under different circumstances 1031 exchanges present advantages and disadvantages regardless of the motivation for the sale or purchase of property.

The circumstances for every second-home buyer are unique, but if you’re selling a property in addition to buying one, you owe it to yourself to at least do the math and see if the formula for you adds up to “1031.”

Second Home Buying
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