People who rent out a vacation home may do so to offset the expenses of ownership or to generate income (ideally a profit). There are several important considerations when deciding to rent out a vacation home.
Keep in mind that peak rental periods are likely the same weeks that the owner will want to use the property - summer weeks for beachfront properties, winter weeks at ski resorts and the holiday season. An owner who is willing to use the property during off times may have a better chance of renting out the vacation home while being able to collect higher rental fees. As a general rule of thumb, a week of in-season rental is about equal to a month of off-season rental. For example, if a house rents for $5,000 per week at the beach in the summer, the owner should expect about $5,000 per month during the winter.
An owner can market and rent the property on his or her own. Owners can list properties for rent on websites such as Vacation Rentals by Owner (www.VRBO.com). The owner should include a description of the property, including details regarding the location and amenities, as well as photos and rental fees. Owners may also advertise in target newspapers or magazine and other online portals.
Do-it-yourselfers may enjoy the savings of not involving a property management company and being able to take advantage of certain tax benefits. If an owner has an adjusted gross income (AGI) of less than $150,000, certain tax benefits exist: passive losses can be written off if the owner manages the property himself or herself (without an agent of property manager).
Keep in mind, however, that taking care of the property on one's own may come at a price. Many vacation properties are continually exposed to excessive wear and tear, and maintenance issues and repairs are frequent. Making the repairs or even arranging service calls can be frustrating and time consuming.
Many owners solicit the expertise of a qualified property management company to handle the rentals. The company takes care of the marketing, renter interactions, collection of rental fees and all other aspects of the rental process. In addition, the company generally provides routine maintenance services and can arrange for repairs. For these services, the owner will pay a fee, a commission on rental fees collected or a combination of the two, depending on the extent of the management services provided.
14-Day or 10% Rule (IRS)
Tax laws offer some tax breaks that may help make vacation-home ownership more affordable. Firstly, if a vacation home is used solely for the owner's personal enjoyment (and it is not rented out at any time during the year) the owner can typically deduct real estate taxes and home mortgage interest. Like a primary residence, owners cannot write off any of the costs associated with utilities, upkeep or insurance.
The tax benefits an owner may be entitled to depend on how long the property is rented out each year and how much time the owner spends in the home. There are three categories into which owners fall:
- The owner rents out the property for 14 days or less. A vacation property can be rented to another party for up to two weeks (14 nights) each year without that income begin reported to the IRS. The house is still considered a personal residence, so the owner can still deduct mortgage interest and property taxes under the standard second home rules.
- The owner rents out the property for 15 days or more, and uses it for less than 14 days or 10% of days the home was rented. This property is considered a rental property, and the rental activities are viewed as a business. If a property is rented out for more than 14 days, all rental income must be reported to the IRS. The owner can deduct rental expenses (including mortgage interest, property taxes, insurance premiums, fees paid to property managers, utilities and 50% of depreciation), but must factor in the amount of time the property is used for personal use versus rental use.
- The owner uses the property for more than 14 days or 10%of the total days the home was rented. If the owner uses the property for more than 14 days or more than 10%of the number of days it is rented (whichever is greater), the property is considered a personal residence and the rental loss cannot be deducted.
The tax implications of vacation property ownership are complicated. Owners and potential buyers should consult with a qualified tax specialist to gain a full understanding of tax implications and laws, and to determine the most favorable ownership situation.
If an owner decides to rent out the property or place the property on a rental program, he or she will have set rental rates so that it gets the maximum number of renters and generates good cash flow. If rental rates are set too high, the property will not be rented out as often; if rates are too low, it will be difficult to make any money. The owner must take several things into consideration when setting rental rates:
- Competitors' Rates - How much are similar properties in the area renting for?
- Expenses - How much will it cost to rent the property? Cleaning fees, insurance, management fees, utilities, pool cleaning, maintenance, renovations, etc.
- Time - How much time will the owner dedicate to renting out and maintaining the property?
InvestingThe tax rules on a second home vary, depending on how the property is used.
TaxesIf your home or second home is not in the United States, you can still get U.S. tax deductions. How many and what kind depends on whether you also rent it.
TaxesOwning a second home is a great investment for a variety of reasons, but you need to know the tax implications of multi-home ownership.
InvestingFind out how to profit from your property when the housing market dips.
RetirementLearn whether rental income is compatible with your lifestyle, how to identify suitable properties, common pitfalls to avoid and how to secure financing.
Managing WealthOwning rental property can be a rewarding and profitable experience, but it comes with some real risks.
InvestingMortgage interest rates are low, but consider these dos and don'ts before making the leap into rental property ownership.
InvestingNever before has rental revenue represented such a large share of income gained by American households.
Financial AdvisorReal estate tax law is not the same for rental properties as it is for residences. These tips can help you pay less in taxes.
InvestingLearn how to find suitably priced rental property and the right rent level. Determine what maintenance costs to expect and what tax breaks are available.