Summer is coming to an end – did a memorable vacation leave you thinking about a vacation home? Real estate can be a great investment, but there are some points to consider before making a vacation home purchase. My family has owned rental properties for 30+ years, and I personally own rental property and manage properties for some of my clients. When it comes to spending a significant amount of money like this, it’s a good idea to thoroughly evaluate the scenario to help ensure you make a sound investment.
First, how do you intend to use the property? Will it be solely for personal use, or do you need rental income to supplement the mortgage payments? And what are the pros and cons to each scenario? We can advise you on ownership, depreciation, expenses, lease or rental contracts and management expenses to help you make the best decision for your situation.
It’s important to note that there are rules for personal use if you intend to rent as well. For example, personal use cannot exceed 14 days in a calendar year, or the property does not qualify as a rental. And if you are going to use a management company, make sure to get several references that you are confident in and do plenty of research before you sign with a company. Know UPFRONT what your costs will be; this can be a nasty surprise if you don’t do your due diligence.
As you can imagine, additional property impacts your taxes, and there is another layer when you add in the rental piece. Record-keeping is probably the most important thing with a rental property. And if you own more than one rental property, make sure you’re keeping clear and separate records for each. You need to be able to document rent income – when it was received and from whom. You also must track related expenses for each property you own.
Rental losses are not deductible against normal income, unless you are a real estate professional for tax purposes. This is why many rental property owners have more than one property – losses on one may offset against income on another. And, generally speaking, rental properties are “independent” of your principle residence deductions. Rentals are reported on Schedule E, and must be reported per property, with the appropriate income and expenses.
It’s our job to be the expert on tax laws and how they apply in a variety of scenarios. If you’re considering a vacation home purchase and want to discuss the ins and outs as you work your way toward a decision, give us a call any time!
