Call it the boom within the boom: Financings of second homes more than doubled since the beginning of this decade -- a growth rate far exceeding financings and sales of primary homes.

What's behind the unprecedented surge in the second home sector, which includes both investor units and vacation houses? National Association of Realtors economist Keunwon Chung approached this question from an unusual angle -- a vast trove of federal Home Mortgage Disclosure Act data on loans closed during the five year period 2000-2004 -- and came up with two main answers. The first is already well known: Baby boomers in their forties and fifties flooded into the second home market looking for recreational property and better investment returns than they could get from the stock market.

But Chung's second driving force has had much less attention: In 1997 Congress revamped the federal home sales capital gains tax rules, eliminating what had been a long-standing incentive for home sellers to "roll over" profits on the sales of their primary homes into larger and costlier replacement houses. Under the old rules, as long as you kept buying more expensive replacement homes, you could defer capital gains taxation on your profits indefinitely.

Under the revised code, married, joint-filing home sellers could keep up to $500,000 of sales gains tax-free and only pay taxes on profits above that limit. Single-filing taxpayers could keep the first $250,000 of their gains tax-free.

Congress may not have intended this result, but the fact remained: Suddenly "homeowners did not have to buy expensive houses to avoid capital gains tax anymore," says Chung. "Instead, buying a smaller, less expensive primary residence and a second home with the tax-free gains made second-home buying more financially attractive to homeowners than ever before."

Consider this example. Say you're married and have a $500,000 gain on your long-time family home. Under the old tax rules, you might well have opted to buy a bigger, costlier replacement house to protect your gains from taxation. But under the revised rules, you might take $300,000 to "downsize" -- to buy or put a downpayment on a small condo unit closer to the center city, cultural attractions and transportation. You might take the $200,000 balance to buy or put a downpayment on a second home -- maybe a weekend getaway place in the country or an investment unit in a resort area.

According to Chung's data, second homes represented just 8.6 percent of all home loans closed in the year 2000, but accounted for 14.2 percent -- a nearly 70 percent jump -- in 2004. In some states, second homes and investment unit financings saw explosive growth. In Nevada, where the five-year average annual share for second home loans was 17 percent, the total number of such financings increased by a stunning 384 percent between 2000-2004.

In Florida, nearly one out of five home financings during the same period was for a second home. In Hawaii the proportion was even higher -- 27 percent. Arizona, Idaho, New Mexico and Utah -- all prime recreational draws -- also saw explosive growth. But so did a few markets not generally associated with second homes. Top on the list: The District of Columbia, where one out of 10 financings between 2000-2004 was for a second home, most likely in the form of investor units.

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