by Jill Gianola

Before you raid your nest egg to buy that vacation home you've been dreaming of, complete this worksheet and you'll know just what to do.

Do you long for a cottage by the sea or a chalet in the mountains -- a place to escape on the weekends when you're looking for a little solitude and reflection? Or maybe you want to fly off to an exotic locale once a year where you can totally disconnect from the workaday world. It's tempting -- especially when you consider the possible tax advantages!

But before you go ahead and raid your nest egg or take out a home equity loan to plunk down a deposit on your dream, do your homework. Answer these questions and find out if a second home fits in with your lifestyle and finances.

Lifestyle

Can you pick up and go at a moment's notice?
If you answered yes, then a weekend escape (like your own Camp David) might work for you. On the other hand, if your weekends are filled with soccer games and ballet lessons, or if you and your partner have different schedules, you might find your retreat going unused much of the time.

Do you return to the same vacation places year after year?
If you are a creature of habit, a vacation home may just be your ticket to happiness. If, however, you prefer exploring new places, you may grow weary of returning to the old second homestead. You could potentially swap vacation homes to try out new locales, but finding folks to trade with -- and then coordinating schedules -- makes many exchanges unsatisfactory.

Do you like entertaining?
Word will get out if your second home is in a desired, accessible location. Are you ready and willing to include family and friends on your vacations? How about turning over the key to relatives for their vacations?

Do you prefer relaxing in a home of your own to basking in amenities like daily maid service?
If a vacation isn't a vacation unless someone else does the cleaning, cooking and dishes, you'll be happier in a hotel where those chores are your host's problem.

Finances

Can you afford the down payment?
This is only the tip of the iceberg, but you'll need to come up with about 20 percent of the cost of the vacation house. Tapping into a home equity line on your main house is an option, but be careful. What you're actually doing is putting your house up as collateral. So you don't want to skip payments and risk losing your primary residence. And watch the "limits": You can typically deduct interest on no more than $100,000 of home equity borrowing. Tapping into your 401(k) plan is a bad option -- it sets back your retirement planning and the money you repay is taxed twice.

Can you afford the monthly and seasonal expenses?
Mortgage lenders are more cautious when it comes to financing vacation homes, so your interest rate may be higher than on your primary residence. In addition to principal, interest, taxes and insurance, you'll probably have utility bills, condo or landscaping fees, repair and maintenance costs, plus the cost of furnishing and equipping another home.

Could this home ultimately threaten your financial security?
A vacation home can strain the family budget, so make sure you don't jeopardize your retirement plan or children's college education because you'd like a summer retreat. Figure out how much you need to put aside each month to cover the necessary saving. You may even want to have that amount automatically drawn from your paycheck or checking account so you don't mistake those funds for recreation dollars. Then, if there's money left over for the down payment, mortgage payments, maintenance costs and an emergency fund to cover three months of your vacation home expenses, strap on that beach hat, slide into those flip-flops and go house hunting.

Do you know the tax consequences if you sell?
A recent change in tax law allows you to pocket the entire gain on your primary residence if you have owned and lived in it for two of the past five years. If your vacation home's value has skyrocketed in price since you bought it, consider moving in full-time for two years before you sell.

Do you plan to rent your second home to others?
Rental income can subsidize your dream. But there are tax consequences you need to consider before hanging the "For Rent" sign. If you use your second home strictly as your own vacation place, you can deduct the mortgage interest and property taxes on Schedule A -- just as you do for your principal residence. If you decide to rent it out for just a few days (fewer than 15), you get to keep the rental income tax free.

On the other hand, if you opt to rent out your vacation home most of the year (personally using it for no more than 14 days or 10 percent of the time rented), you claim the income and deduct all expenses, including depreciation. If your income turns out to be less than your total expenses for the year, you may be eligible to claim a loss and keep 100 percent of what you made on the house.

If you want to use the home for more than 14 days and rent it out for more than 14 days, you must allocate expenses between personal and rental use. You may not claim a loss.

Now that you've answered these questions, you know if you're ready to put down a deposit on that beach house or you're better off booking reservations at a fabulous resort. Either way, we at Money wish you a bon voyage!