Renting a Second Home Offers Many Benefits

Many people have two homes, one being their primary residence and the other a vacation home or retreat. Under present law, any interest and/or taxes paid on a second home are tax deductible just as taxes and interest paid on a primary residence are. The only difference is that “points” paid for a loan on a nonprimary residence cannot be deducted at the start of the loan. They must be amortized over the life of the loan.

If a vacation home is rented to others, there may be substantial tax and economic benefits. If a residence (primary or vacation) is rented for less than 14 days a year, the rent received is not even reported as income. For example, Los Angeles residents who rented their homes only during the Olympics received the rent money tax-free.

To be considered rental property, a second home must be held out to the public as available for rent and the owner’s personal use must be for less than 14 days per year. As soon as a property is rented out for more than 14 days in a year, the income becomes reportable and the expenses become deductible. There is a formula for allocation of expenses between personal and business use of vacation homes when the owner spends more than 14 days a year there for personal use.

The 14 days do not include time spent repairing, remodeling, fixing up the home or otherwise getting it ready for rental. This is especially important for vacation homes in resort areas. Places such as ski resorts do not get much traffic during non-ski season and the number of rental days is limited. This increases the economic cost because fixed expenses and payments continue throughout the year.

Adequate records must be maintained for rental property in order to substantiate reports of income and expenses. Purchase documents such as escrow closing statements and invoices for furniture, appliances and major improvements must be kept to substantiate the basis for depreciation.

Also, the owner should keep a copy of the first property tax bill to help establish the difference between the value of the land and that of the building. The Internal Revenue Service will generally use the assessor’s ratio of land to building. If you disagree with the ratio, you may dispute this method by supplying independent appraisals. If a rental agent is employed, you may use the reports the agent generates. The records should indicate who rented the property, date rented and the rents received. Your records must also show the dates you stayed at the property and the reason for your visit.

If your visit to the property was for an annual inspection, fixing up, repairing, remodeling or for showing the facility to prospective tenants, your expenses for the trip may be deductible. These expenses include travel and/or mileage, meals, lodging and telephone, to name just a few.

Many working people would like to invest now in a home to which they might retire. Purchasing now, even though you are not ready for retirement, and renting the property to others can ease the financial burden while providing for a future retirement home without the cash outlay necessary when the working years are over.

The tenant’s rent can pay all or part of your expenses and mortgage on the rental property. And some of the rent payments may be sheltered with depreciation, resulting in a tax benefit.

Real estate is still considered by many to be one of the best investment vehicles and, if the investment is made wisely, it can help provide security for retirement.