When summer rolls around, people take vacations and they often find that an area really appeals to them. The plan becomes to come back over and over to enjoy the water, snow or other area amenities that drew them there in the first place. Now we come to an old saying that is too often true:
People buy based on emotion and then justify the purchase based on logic.
Let’s use a ski condo in a popular snow skiing area out west as an example to analyze the emotion justified by logic idea. You’ve vacationed here and rented a ski condo the last couple of years. You love the area and the ski-in and ski-out condo next to the lifts. It gets you on the slopes faster and makes the most of your trip.
You’re just about to sign on the dotted line and buy a condo, and you expect to rent it out when you’re not using it to offset some of the costs of ownership. For many, the questions asked of the management in the condo project usually involve costs to own, how many days it can be rented out, and how much the rental income may be. That’s a top-level view and simple calculation, but there is a whole lot of iceberg under the surface.
The IRS and Vacation Home Rental
This isn’t tax advice, and it’s complicated enough to require consulting an accountant BEFORE you sign that purchase agreement. However, just a few quick notes that should give you food for thought:
- Renting it out for 14 days or fewer each year, you don’t have to report the income. Of course, that’s not going to generate the income that you want to justify that purchase.
- Renting it out for more than 14 days makes you a landlord in the eyes of the IRS. You then get deductions as an investment property and report the income. However, you need to allocate based on the time you use the property.
- Limiting your use to fewer than 14 days or less than 10% of the time the property is rented out makes it an investment property. You can deduct expenses and even depreciation. You can also take losses that can offset other investment income. It’s complicated, so you need that accountant’s advice.
That’s a very brief overview of a complex tax situation, but one thing it does do to help you in deciding is in forcing you to determine your expected use of the property. If owning it on the slopes is going to get you there more often, consider that in your planning.
Is it Really a Good Investment for Offsetting Expenses?
Using some actual numbers from a ski condo project in the Rocky Mountains, it is a surprise to many people just how costly the actual management is when you’re renting it out. You’re already paying condo fees of ownership, and they can be quite a nut. In this project, the fees alone run between $3,000 and $6,000 per year depending on the unit. That’s one reason you’re thinking of renting it out when you’re not using it. Getting back some of the thousands of dollars in condo fees is a nice plan.
However, when you’re taking that expected $200/night average income and multiplying it by maybe 60 or so nights/year occupancy, that’s just around $12,000. Remember that your unit is competing with others. That would offset your fees, and show a profit except for one big expense you now have; the short-term rental management fees and cleaning fees. In this example project, the fees were 45% of rental income. Suddenly, our $12,000 now becomes around $5,400. There went the profit, and only if it rents well.
Then consider that “renting well” means that most holidays during the season will get booked up by renters. If you try to reserve them for your fun, you’re going to cut your income significantly, particularly because holidays command the highest nightly rents. Suddenly you’re finding that this really is just a purchase for having fun and it’s going to cost you. What we’ve discussed here applies much the same to a beach condo, though you do have a longer season, sometimes year-round for rentals.
Even so, are you buying your fun destination or taking on a business headache? In our example area, buying a home in the town and driving up to the slopes is a much better investment. You don’t have the high fees of ownership, as there is no entrenched staff for management and maintenance. Though you still may have a 35% to 45% management fee for renting it out, your monthly/quarterly condo fees aren’t there.
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