Renting Vacation Home Has Advantages
A few days ago I wrote about what to think about when considering buying a vacation home.
If you do buy a vacation home, you should consider renting it to generate some additional income to offset the costs of vacation home ownership.
Most vacation homeowners don't rent their home. I would argue that even vacation-minded second homeowners should think of their vacation home as investment, particularly when the possibility for rental income is considered. Think of a second home as similar to an investment in a dividend paying stock - as an investor you would never think of declining the dividend income owed to you on the stock. But that is just what owners of second homes do when they forgo the potential to rent their vacation home when they are not using it.
When selecting a location for a second home, consider a location where there is good potential to collect a premium rent for a limited time, such as during a seasonal rental or during a special event. Places near major sports venues, theme parks, resorts and water are ideal vacation home locations. Generating rental income will help to defray some of the costs of owning a second home.
Vacation Home Tax Breaks
One of the tax breaks for vacation home owners who rent out their vacation home for short periods is that the rental income received can be tax free. If you rent the home for the lesser of 14 days or ten percent of the days of personal use, the rental income collected for these short-term rentals is tax free.
For longer periods of renting, rental income received must be reported on Schedule E of your income tax return. If you use your vacation home for personal use for the greater of 14 days or 10 percent or more than the days it is rented to others at a fair rental price, then only the expenses associated with period of the rental are allowed to be deducted against the rental income.
For the specific tax reporting requirements applicable to vacation home ownership, see Publication 527 Residential Rental Property.
When You Sell
Let's say you've owned the vacation property for a number of years. If you sell it now, you may still realize a gain. Any gain on the sale of a vacation home doesn't qualify for the home sale exclusion. This means that you will not be eligible to claim the gains exclusion of $250,000 ($500,000 on a joint return) that applies only to a principal residence.
If you used a home as a vacation home in years past and now you use as your principal residence, you can qualify for the exclusion if you've owned and lived in the home for at least 2 years prior to the date of sale. However, the exclusion does not apply to any gain related to "non-qualified use." Non-qualified use means using the residence as a vacation home after 2008. So, if you use the vacation home for all of 2009 and start using it as your principal residence on January 1, 2010, a sale after January 1, 2012 (when the two-year rule is met) can qualify for the exclusion, but not the portion of gain related to the non-qualified use in 2009.
Ray Martin
View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.
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