6 Ways to Make Your Vacation Property Work for You
Vacation homes come with a real opportunity to bring in revenue and cut down on your taxes.
Who doesn't love having a place you can stay in your favorite vacation spots? Beachside condos, cabins in the mountains and lake houses make for great getaways, but they also come with some real opportunities — tax breaks and revenue.
With summer 2022 just around the corner and travel restrictions lifted, everyone is aching to get their trips booked. That means it's a great time to review how you can get the most out of your vacation home.
Embrace a growing market
Covid-19 dropped a big wet blanket on travel plans around the world. Everyone canceled flights and hotel rooms quickly, but the tides started turning last year. 2021 saw such an elongated peak season that some called the "never-ending summer."
Many researchers indicate this return doesn't show any signs of slowing down, either. They predict the value of the vacation rental market to reach $82.63 billion in 2022 and rise to nearly $120 billion over the next decade.
If you've already got a vacation home for yourself (or if you've thought about purchasing one), you might be leaving money on the table by not renting it out during your vacancies.
Pay no taxes on short-term rental income
Renting out your vacation home does not have to be a full-time endeavor. In fact, you can make a good argument for why you should not rent it for more than 14 days per year.
Because the IRS will not tax you for the rent you bring in if you only keep it occupied for two weeks or less. This can prove helpful for properties in areas with a highly concentrated, short-term event. You can get a nice little income boost without paying taxes on it.
Know how long you can stay in your vacation home
Who says you can't have your cake and eat it too?
Many owners use their rental units throughout the year. This is fine from a tax perspective as long as you monitor how long you use the space.
The IRS will count your unit as a rental property if you keep your personal occupancy under two weeks a year or 10% of the time it is rented, whichever is greater. They call this the 10% rule, and knowing that number can help you ensure you don't overstep.
You'll also want to note that "personal use" has a somewhat broad definition, including the property being used by:
- You or anyone else has an interest in it.
- Family members who pay less than a fair rental price.
- Someone with an agreement that allows you to use a different dwelling unit while they use yours.
- Anyone else who does not pay a fair rental price.
Deduct basic expenses for your vacation home
According to the IRS, those who receive rental income for a dwelling unit can deduct expenses. These expenses include: Mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance and depreciation.
Keep in mind that if the unit is occupied for personal use in addition to the income, you will have to separate expenses based on the number of days you use it for each. So while you won't be able to get all the write-offs, you can still get back portions of what you spent on these items.
Discover associated deductions
Additional deductions exist beyond those directly associated with the property when you use the unit as a business.
Did you have to drive to the property for maintenance? Write off the travel expenses. Did you manage your bookings or other business material from your house? Take the home office deduction.
What about developing your online presence? Did you create a website or spend some money to list on Airbnb, VRBO or other sites? Classify these expenses as advertising and write them off.
Another bonus deduction that comes by listing with short-term rental companies is the guest service fee. You can deduct that payment from your income as well.
Partner with a tax advisor
Tax laws get complicated for any business venture, but the blurred lines between personal and commercial use of property make things even trickier.
Working with an experienced tax advisor is the best way to ensure you maximize your deductions and keep as much of your income as possible. These professionals will work with you to develop a strategy and solutions that help you put more money in your pocket when tax season comes around.
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