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Are You Thinking About That Vacation Home?

March 2, 2011

One of the most asked questions during tax season is “How can I pay less taxes?” There are a variety of ways and that is what tax planning is all about, and our favorite service that we offer at Gunwel Tax & Bookkeeping. Some clients are part of the income bracket that could benefit from a 2nd home or vacation home. I know that seems crazy to give that advice in this economy, but it is an option. And if you are one of those clients that are thinking about a vacation home her are 5 things you need to know.

  1. Now is a good time to pounce. In many second-home hot spots, prices are still close to their five-year lows. For example, in Napa California prices are down 47% from their 2006 peak; the average house in Ocean City NJ costs 24% less than it did in 2006. And though a few hard hit markets like Las Vegas, Tucson, and Miami could fall a bit further, most economists believe the biggest declines are behind us.
  2. A home is a better deal if it’s rentable. You may think you’ll keep the retreat all to yourself, but it’s still smart to shop as if you’re going to rent the place out. That’s because a home’s rental potential can affect its resale value. Before you bid on a house, make sure the homeowners association or township allows short-term rentals (many do not).
  3. Don’t count on rental income to pay all your bills. The typical property rents out just 17 weeks a year. You’ll need to pay for cleaning, maintenance, insurance, and maybe  management fees (at least 15% of income). To get a handle on a property’s income potential ask a management company for  a history of rental dates and rates for homes comparable to the one you’re considering. If your monthly loan payment is less than or equal to one peak week of rent, you’re likely to break even.
  4. Your loan rate depends on how you use the house. Lenders have raised standards across the board, but they’re giving extra scrutiny to vacation homes. Use the property primarily as a second home and you’ll pay about the same mortgage rate as your would on a primary residence. If you need rental income to qualify for the loan, however, the house is treated as investment property – so you’ll have to fork over as much as 25% for the down payment and pay up to one percentage point more in interest.
  5. Tax benefits can be sweet. Rent the house out for two weeks or less and you won’t have to report a cent of income to the IRS – and you can still deduct property taxes and mortgage interest. Stay there for less than two weeks or 10% of rental days, whichever is greater, and you can deduct operating costs – everything from cleaning fees and maintenance to linens and repairs – in addition to interest and property tax.

 Years ago I had a house that we rented out. I thought I wanted to gain wealth by acquiring properties and becoming a landlord. It took just one visit to the house to fix a toilet to know that being a landlord was beyond my emotional make-up. The tenants had lined all the windows with empty beer cans and the toilet was broken due to trash they tried to flush. I sold that house within 2 months and said nuff of that! Let GAI (www.gunwel.com) help you with all of your tax needs. We can advise you on all the details on renting out your new property and how that will affect your tax return. Call us at 212-979-6830 or stop by for a visit. See you soon!

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