If you are among the many Americans who own a second home that you occasionally use as a vacation getaway, you may be leaving an important source of income untapped. It’s worth taking the time to understand the value of renting the property. Before you make any decision to become a “vacation landlord,” remember that some decisions are worth careful consideration.
Do-it-yourself or hire a team
First, consider how much of the burden you want to take on for yourself. Renting a property may create an income opportunity, but it requires work. If you are going to do it yourself, you’ll need to advertise the property, follow-up with potential renters, collect the rent, establish expectations for your renters and make sure the property is in good shape. You may want to hire someone for housekeeping services, yard care and maintenance work. But that comes at a cost and it still leaves work for you.
The alternative is to use a full-service management company that will handle many of the tasks related to booking and managing the property. Taking this route may cost you as much as 20 percent or more of the rental income generated by the property. You have to determine if that investment is worthwhile for you.
Tax considerations to keep in mind
Another factor to consider is how much you plan to use your vacation home. There are tax ramifications based on the amount of time you live in the home versus the time you rent it out.
When you rent your home for 14 days or less in a year, rental expenses are not deductible, and the rental income is excluded from your gross income.
If the property is rented for more than 14 days during the year, rental expenses are generally deductible. However, if you use the home as a personal residence for more than the greater of 14 days or 10 percent of the days it is rented during the year, then deductions are limited to gross rental income. Certain other rules may reduce or eliminate your ability to claim rental deductions.
Keep in mind that state and local taxes may apply no matter what decision you make regarding the period your home is rented out. It is best to consult your tax advisor to understand all of the potential tax ramifications of your rental strategy.
Be prepared to share
When you rent your vacation home, the space is no longer just your own. Sharing your property with others will undoubtedly lead to additional wear-and-tear on your home. Make sure you limit the number of guests at any one time to an amount the home can reasonably accommodate. Spell out policies on smoking, pets and even a minimum age. The clearer your rules and expectations are for the renters, the less likely you are to encounter unpleasant surprises after renters have left the property. Do what you can to make the experience a positive one for renters to build repeat business and effective word-of-mouth marketing.
When you choose to rent your vacation home, you are entering the hospitality business. Be sure you are prepared to meet the expectations of people who will be paying to stay in your home rather than in a hotel or other establishment. Careful thought before renting will also ensure you are prepared for how the changes will affect how and when you can use your vacation home.
Phil Decallejon, CFA® is a Financial Advisor with Orchard Financial Group, a private wealth advisory practice of Ameriprise Financial Services, LLC. in Los Angeles, CA. He specializes in fee-based financial planning and asset management strategies and has been in practice for 9 years. To contact him, call 310.582.3500 | orchardfg.com | 12400 Wilshire Blvd, Suite 1210, Los Angeles, CA 90025.
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