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Buying a vacation home for rental and personal use can offer a number of advantages, but is it right for you? Learn what you should consider before purchasing, the tax implications of owning a vacation rental home and how to rent it to offset expenses.
With interest rates still historically low, you may be tempted to purchase a second home to use as a vacation rental home (and for your own personal use as well). There is a market for renting out your vacation home, especially as travelers look for more affordable options closer to home.
Is owning a vacation rental home right for you?
Before purchasing a vacation property, it’s important to research any local laws or property restrictions that could affect your ability to rent your home. In addition, you need to take into consideration the location of your vacation rental home. Is it near a popular tourist attraction or destination, such as a beach? This will affect that marketability of your vacation home. You also need to be sure you are willing and able to:
- Do the necessary research to estimate how many weeks your vacation property will likely be rented, your monthly costs and your income potential.
- Give up the use of your vacation home during the peak season, when demand for your residence is the greatest.
- Put in the necessary work to advertise, screen tenants, and hire cleaning and maintenance crews.
- Maintain your second mortgage if times get tough in either the real estate or vacation markets.
Tax implications of owning a vacation rental home.
Purchasing a vacation home could come with some tax breaks. As with any tax situation, how big of a tax break all depends. Here’s a quick breakdown:
You use your vacation rental home mostly for personal use.
If you rent your home for fewer than 15 days a year and use it for personal use for more than 14 days, your vacation home is considered a personal residence. (Personal use days are days when you use the residence, when you offer it to family and friends for free, when you rent it for below fair-market price or when the home remains vacant.) In this case, you simply deduct the interest and property taxes as you would for your primary residence. There’s no need to declare any rental income.
You mostly rent out your vacation home.
If, on the other hand, you rent out your vacation home more than you use it personally, then your home falls under the tax rules for rental properties. This happens if you rent more than 14 days a year and your personal use doesn’t exceed 14 days a year or 10 percent of the rental days, whichever is greater. In this case, you’ll need to report your rental income; however, you can deduct expenses such as insurance, utilities, property management fees and depreciation. (Deductions must be pro-rated based on the number of days the home was used for personal use versus rental use.)
You use your vacation home equally for personal use and rental use.
Vacation homes that are rented more than 14 days a year and have personal use of more than 14 days or 10 percent of the rental days (whichever is greater) are considered personal residences. In this case, you can deduct interest on up to $1 million of your mortgage debt for two personal residences. You will, however, still need to account for rental income and expenses. (Again, expenses should be deducted on a pro-rated basis.)
Rent your vacation home
Now that you have your vacation home and have decided to rent it, it’s time to find renters. Many travelers look to rent vacation homes because they typically offer more space, full kitchens, multiple bathrooms, washers and dryers, and amenities they may not find at hotels, such as the possibility to bring pets. Here are some tips for attracting these travelers:
- Price your home right. Study rental rates for similar properties in your area.
- Post your home online. A number of websites, such as HomeAway.com and VRBO.com, are available for you to post your vacation rental home. Be sure your information is accurate and complete.
- Take lots of pictures and post them with your listing.
- Consider hiring professional management for your property. If you don’t live close to your vacation home, hiring a professional management team can make sense. They can quickly resolve any tenant issues, but they’ll also take a portion of your rental income. Interview several companies to find the right fit for you.
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.
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