3 Ways to Make Your Vacation Home Pay You Back

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Published March 02, 2011

| HSH

Last time you used your vacation home was a few months back. It pains you to see it sit empty while you keep writing checks to keep it in the family. If this sounds familiar, chances are you're tempted to rent that peaceful paradise retreat for part of the year.

On the surface, it's a handy way to offset some costs, and maybe even make a little extra on the side. There are, however, a number of costs involved in making it a viable business venture. While there are some tax breaks and benefits, it's also pretty complicated.

On top of that, you might discover that finding and dealing with renters is hardly a day at the beach. Do you really want to be a landlord?

To make your vacation home pay for itself, here are the three basic questions you need to ask yourself:

 

1. What's it really going to cost? You're already paying for the big-ticket items--mortgage payment, property taxes, homeowner's insurance, and possibly homeowners and condo association dues. With increased home use, though, some of the secondary core bills will ratchet-up, including electric, water and telephone. Moreover, there are several additional out-of-pocket costs that can crop up:

*You might sign-up for WiFi and satellite TV, if you don't already have these services.

*Housekeeper or cleaning service payments during rental periods are part of doing business.

*You'll need funds set aside for a jump in unexpected maintenance and repair bills.

There are also a handful of potential one-time hits to your pocketbook. To spruce the place up for renters, for example, you might spring for painting the interior or exterior of your home and a face-lift for the landscaping. Other possible amenity outlays: new bedding, appliances, furniture and electronics.

Next up, is reining in renters. Unless you're a born marketer, that's a whole other rodeo. A good property manager/rental agent can be a key partner to have in this arena. That's particularly true if you'll be renting out a vacation property that's a couple of hours away from your primary home.

This kind of professional help doesn't come cheap, however. Management fees can range from 10% to more than 30% of rental income, depending on the amount of TLC offered. You can list with a local real estate agent, or a company that specializes in vacation resort properties in the region where your home is located, say Long Island or the Caribbean.

At Villas Caribe, an Atlanta-based firm that represents over 3,500 villas in St. John, St. Barts and other warm weather destinations, for example, a homeowner typically pays a fee of 20% of the rental for the firm to handle all marketing, accounting and concierge services, according to CEO Bobby Gibson.

Owners pay a 10% cut to agents at Kerrigan Country Realty in West Hampton Beach, Long Island. "Our homeowners don't want to answer random calls for repair issues, suggestions for restaurants, names of caterers and where to take a kid for horseback riding lessons at all hours of the day," says licensed sales associate Steven Rosmarin.

If you're up for the job of answering phone calls and e-mails, screening tenants, hiring cleaning crews, taking care of maintenance issues and prepared for emergency support if something unexpected happens, then you can save yourself a chunk of change.

In addition to all that hand-holding and managing of your rental, it will be up to you to market it too. That means posting your property on rental home web sites like VBRO.com, parent company HomeAway.com and Zonder.com.

At VBRO, for example, you'll pay around $300 for a one-year online listing. That includes five photos, an online calendar and links to your information. You can also build a simple website for your property and post away on Craigslist.org with the link back to your site.

Bottom line: Vacation homes typically need to be rented 15-to-17 weeks a year to break even with expenses, according to Christine Hrib Karpinski, owner of several rental properties and author of "How to Rent Vacation Properties by Owner."

2. What's the tax benefit? Take a breath. It's convoluted. Depending on how frequently you use your home yourself, how often you rent it out and the number of days it sits empty, you will land in different tax categories.

In general, "the magic number is 14," says Abe Schneier, a senior technical manager at the American Institute of Certified Public Accountants. If you rent out your second home for 14 or fewer days during the year, the IRS considers it a personal residence and isn't interested. "You deduct mortgage interest and property taxes just as you do for your principal home," he says.

Rent for more than two weeks and all rental income must be reported, but you can deduct your mortgage interest and other expenses during the time your home is rented against your rental income. That includes real estate taxes, utilities, depreciation, maintenance, and property insurance.

However, you will not be able to deduct your rental expense in excess of your gross rental income. If you itemize your deductions on Form 1040, Schedule A, you may still be able to deduct mortgage interest, property taxes, and casualty losses on that schedule.

If you limit personal use to 14 days, or 10% of the total days it is rented to others, the vacation home is considered a business and up to $25,000 in losses might be deductible each year. That's why lots of vacation homeowners spend plenty of time "fixing up" the property.

Those maintenance days don't count as personal use. "If you're going to your property and taking off wallpaper or bringing in carpet, that doesn't count against that 14-day period, even though you might hit the pool in the afternoon," Schneier says. Make sure you have receipts so you can prove that's why you were there.

Other tax nuances:

*The entire amount you pay a property manager is deductible.

*You can depreciate the cost of improvements that you make to your property, say, you added a deck, a swimming pool, or a Jacuzzi.

*Don't try to stretch the expenses too far. That's a big IRS red flag. If you are using a property management company, you will probably be OK because there is a third party involved who is monitoring the expenditures, according to Schneier.

For further explanation, you should consult IRS Publication 527.

3. How will my mortgage be affected? If you decide that you are only going to use the property as a rental, you should make certain that your insurance policies cover that fully. "You should probably notify your mortgage lender that a change in status has occurred," says Keith Gumbinger, HSH.com vice president. "The new status may trigger a change in terms of your mortgage contract, required insurance coverages and more."

And if you do rent, for peace of mind, don't forget to remove those personal photos and other keepsakes.

The original article can be found at HSH.com:
"3 ways to make your vacation home pay you back"

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http://www.foxbusiness.com/personal-finance/2011/02/28/3-ways-make-vacation-home-pay/