In an economic climate like today, an additional income can be undeniably helpful in offsetting the impact of higher prices and the cost of ownership. Renting your vacation home is an excellent way to capitalize on your assets and have some extra spending money where you need it most. It can be extremely rewarding to turn your vacation home into a steady stream of revenue – you just have to know the rules.
To make your rental successful, you need to consider taxes, paperwork, and the requirements before you get started. This will help your decision be as profitable as possible and yield the financial results you’re looking for. Let’s go through the key points you need to pay attention to before renting so you can get the job done like a professional.
The 14 Day Rule
If you’re planning on renting out your vacation home for less than 14 days a year at fair market value, you may not need to pay any taxes in this regard. To qualify, the property must be your personal residence, which will depend on if your personal use exceeds 14 days, or 10% of the days is rented to others at fair market value. And if you’re renting the rest of the time at less than market price, those days can count as part of your tally as well.
Something to think about: Days spent working on the property don’t count as personal use – but if you or a family member are there for 14 days or less, you’ll be able to qualify.
Under this rule, you can’t make any tax deductions for depreciation on your rental, but it’s possible to claim some or all of your mortgage interest and property taxes on Schedule A of your 1040.
If you want a bit of extra tax-free income without a lot of time put into it, this could be a good route to take.
Becoming a Landlord
If you’re planning on embarking on a more lucrative venture and renting over 14 days annually (or 10% of the days the property is rented), you’re officially considered a landlord and must include the rent(s) received.
This means you can make deductions if they don’t exceed the income you make. By dividing the number of days you’ve rented the property by the total days of personal and rented use, you can find out how much you can deduct.
For example, if your house is rented for 120 days and used personally for 30 days, then 80% of the use is rental (120 out of 150 total days). You would allocate 80% of your maintenance, utilities, insurance, etc., costs to rental, and 80% of your depreciation allowance, interest, and taxes for the property here as well. The personal use portion of taxes is a separate deductible.
As long as you’re not providing housekeeping, meals, or other hotel amenities, you’ll only have to worry about Schedule E of your 1040. That’s where you’ll report your income and rental-related expenses. If your venture generates a loss, it can be used to offset future rental income.
Make sure to keep a record of days when you are renting, days of personal use, and days spent working on the property. Keep up-to-date records on maintenance updates, improvements, and travel. Trust an accountant to sort out the details, especially if you end up experiencing a loss. Taxes can get trickier in this instance, but the right advisor will be able to handle it for you.
Quick note: Depreciation is a rental property’s best friend. This is where you can really impact and lessen your current tax liability because it is essentially a non-cash deduction that reduces taxable income.
While it’s not mandatory, drawing up a rental agreement for your guests to sign can make life a lot easier. Setting a clear understanding of your expectations, prices, payment methods, security deposits, and cancellation policies can save you from headaches down the road. It’s an extra step to take during setup, but can make a significant difference in how convenient it is to rent out your property. In other words, it’s definitely worth doing.
There are a plethora of free templates available online that cover all the basics. And it's a great idea to have an attorney check it before you put it into use. Having the confidence and security of a contract will better set your rental venture up for success.
Making a spreadsheet ahead of time to account for costs can help you decide whether to rent out your vacation home. Poise expected income against maintenance, insurance, repairs, and amenities. Include state taxes that will likely charge you a resort or occupancy tax. If you’re going to hire a rental vacation manager to do most of the work for you, account for them now.
And don’t forget to check local ordinances for occupancy permits and rental licenses. Also consider marketing costs – posting your home on rental websites isn’t free. And if you’re looking to have a professional photographer, virtual tour specialist, welcome kit creator, or description writer help set you up, count those costs in as well.
Are you going to maintain the property or hire a cleaning crew? Don’t forget about this potential expense in your calculations. Are you going to add furnishings or décor to boost your bookings? Add that in too. Lastly, consider upgrading to a keyless lock for a one-time investment that can make renting much easier.
Inspection and Regular Maintenance
Before you pull the trigger, go through your property to inspect it. Take care of any major issues and make sure the WiFi, entertainment devices, and appliances are working correctly. Check on the furnace and air conditioning units as well. This initial inspection is also a great time to stow away any personal items. A locked closet, attic, basement, or shed can serve you well.
Once your property is ready, keep an inspection schedule to check on these big items regularly. That way you can catch any issues before they become expensive problems and hold your guests accountable if necessary.
Last but not least, make a list of local contractors that can come and help you when you need it. Reliable pest control, roof repair, electric, and plumbing services are good to have on hand. That way if you do have an issue, you’re not left scrambling for someone to call.
The Main Takeaways
If you follow the rules and do it right, turning your vacation home into a rental can be a profitable venture — it all comes down to the time and capital you’re willing to invest. Renting takes a lot of effort, and if you’re hiring someone to do the work for you, that’s a cost you’ll also have to take into consideration. While renting less frequently has a tax-free bonus, renting more can bring in more revenue, so consider your schedule and resources when making the right decision for you.
When it comes to vacation home rentals, a lot of the work is on the front-end, and if the math is in your favor, your revenue tends to build from there. With some planning and preliminary calculations, you can make your vacation home a lucrative asset that brings you — and your renters — joy. If you’re looking to turn your vacation home into a rental property, reach out to K Wealth Advisors for guidance on making the most of your decision. Schedule a GoodFit meeting, and discuss your goals and options today. #KWA
Insightful Planning to Live Your Best Life. #IPtLYBL
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