Owning a vacation home — Part 2Real Estate Wednesday, May 13th, 2015
Part one of this subject pointed out the many benefits of owning a vacation home. But it’s not all fun and games. Vacation home ownership can be tricky, and you might as well think about these things now before you fill the pool.
A good way to begin is to think about what you would expect if you rented a vacation home from someone else. A modern, sparkling clean, well furnished, stylish place is a starter. Amenities: flat screen TV for sure, but how about, a great grill, beautiful glasses and dinnerware, extra dreamy outdoor furniture, plush bed linens. You’ll be competing with other snazzy places, so your home needs to stand out.
Next, management. Someone has to make and coordinate those bookings, set the house up, arrange cleaning. Create the marketing copy and images. It can be you, and if you have the skills and time, it should be you. The IRS allows you to deduct up to $25,000 a year in write-offs if your adjusted gross income is less than $100,000 and you actively manage the property. Over $150,000 AGI and the tax break goes away.
You’ll also have to decide whether you want that July 4 weekend at the house, or you want the rental income. Vacationers will want your house probably when you do, so to make money on the property, you’re going to have to enjoy your house on some of the off-times.
Though you will be offsetting expenses with rental income, there will be some additional expenses to deal with. Some are associated with greater wear and tear and the need to keep the property in tip-top condition. This includes the landscaping. Then there’s the cleaning expense; the property must be thoroughly cleaned before each rental. You’ll probably want at least a set of sheets and towels for exclusive guest use.
The tax issues regarding second homes are complex and you should familiarize yourself with them before you decide vacation ownership is for you. You are permitted to rent your vacation home for up to 14 days a year and not report any of the income. A two week rental a year is a nice little windfall, but it’s not going to cover the costs of ownership.
If you do use the property as an investment and rent it on an ongoing basis, you may still have losses, and these can best be mitigated if you manage the property yourself. Owning and renting a vacation home is challenging for non-accountants. You will have to pro-rate the income and expenses by the amount of time you occupy the property. You will have to report the rental income while deducting rental related expenses on your Schedule E. Expenses related to your personal use go on your Schedule A.
So there are pluses and minuses to vacation home ownership. But while you are lounging on your lovely deck looking out upon gorgeous vistas, you’re unlikely to be weighing and measuring. Just make sure you factor in all the variables before you plunge.
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