Planning ahead and good record keeping can help owners limit potentially costly errors when it comes time to sell a vacation property.
To claim the capital gains exemption, an owner would have to make the vacation property a primary residence for at least two years. If the home is not converted into a primary residence for at least two years, the owner will owe tax on any profit from the sale. If the property was owned for more than 18 months, the profit is considered a long-term capital gain (prior to that it is a short-term gain). Certain expenses can be added to the owner's cost basis when determining capital gains; record keeping and tracking all of the expenses associated with the property is vital.
A 1031 exchange, also known as a like-kind exchange or tax-deferred exchange, is a transaction where a seller swaps a rental or investment property for another rental or investment property of equal or greater value, on a tax-deferred basis. The advantage is that the seller may be able to avoid paying capital gains tax on the exchange. A property must be considered a rental property (and not a personal residence) to qualify for a 1031 exchange. This means that the owner must rent out the property for 15 days or more and use it for less than 14 days or 10% of days the home was rented.
If the home has been used as a rental, a solid rental history can significantly boost the home's value and marketability. Again, keeping accurate records is an important part of vacation-home ownership. Many areas are flooded with vacation properties. The homes may be comparable and offer similar amenities, but one with a strong rental history will likely sell for more money.
Vacation Property Walkthrough: Conclusion
TaxesHere's a rundown of the specific tax rules that apply to homeowners renting out a vacation property.
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.
Managing WealthDiscover the financial factors behind owning a second home and how weighing your options can determine if a vacation home is right for you.
Managing WealthThere is an alternative to letting your cottage sit empty all year, but turning a profit won't be easy.
TaxesBeing a landlord can be taxing, especially when you want to sell. Find out how to reduce your burden.
RetirementLearn whether rental income is compatible with your lifestyle, how to identify suitable properties, common pitfalls to avoid and how to secure financing.
InvestingNever before has rental revenue represented such a large share of income gained by American households.