What is the Purpose of Your Vacation Home?

What is the Purpose of Your Vacation Home?

     When you purchase a vacation home, you must decide whether it is simply for you to enjoy or whether you plan to use it as a rental to earn income. Different tax rules apply. Also, if you’ve never been a landlord or managed a vacation property, be aware: it’s not for the faint of heart.
     In the Ukiah Valley, those with the financial means to purchase a second home often look longingly at the Mendocino Coast when inland summer temperatures top 100. The Coast offers temperate weather, stunning views, fine dining, and a whole host of community events from whale watching to Winesong. This is why it has become such a tourist mecca.
     Even if you love the Coast, you may not want to live there full time. So, what would it mean to buy a house there to enjoy part time?
     First, you must be willing to invest about $1 million to purchase a property (the median home value in Mendocino). Then, if you want to earn income, you must decide how involved you want to be. Purchasing property is a passive endeavor. Managing a short-term rental is not.
     If you don’t mind driving back and forth over the hill to meet with guests, address problems, manage check-out, and prepare the property for the next guests, then you should create an account on Airbnb and Vrbo. With these online booking and marketing platforms, you do all the work.
     If it were me, I’d hire a local property manager and let them handle everything, including the Airbnb and Vrbo listings. Property managers charge from 35-50% of gross income, but they’ll earn every penny. While the Coast is a sought-after location, the rental market is competitive and having a local property manager who can respond to guest questions at a moment’s notice is important.
     A good property manager will handle marketing, booking, guest communications, price optimization, cleaning, maintenance, emergencies, property inspections, local contractor relationships, regulatory compliance, and 24/7 guest complaints.
     Worried that a property manager will eat up all the profit? Remember, it’s all a trade-off. If you want to know what you’d net using a property manager, ask them the following questions. If they’re worth their salt, they know the value they provide, and they won’t get defensive.
     "What would you expect this house to gross annually under your management, and what would I receive after all fees and expenses?" Then ask, "If I managed it myself through Airbnb or Vrbo, what do you think I could realistically net?"
     The Coast is sufficiently remote and weather-dependent, so having someone local who can deal with the house is a huge time saver. Also, local property managers know when to increase pricing based on events and availability. Is it time for the film festival? Are the whales breaching? Is it mushroom season? Experienced local property managers know what will bring in the crowds—and how much people are willing to pay for accommodations.
     So, what if you want to hunt for mushrooms or attend the film festival? Can you use your vacation home and still maintain the tax benefits of having a rental property?
     For a vacation rental, there are two different questions. 1. How much personal use you can have before the property is considered a “home” by the IRS? 2. How do personal-use days affect the amount of rental expenses you can deduct?
     The basic rule is 14 days or 10%. Your rental property is considered to be “used as a home” if your personal use is more than the greater of 14 days or 10% of the number of days you rent the property to others at a fair rental price in a given year.
     So, if you rent the house up to 140 days of the year, you can spend 14 days there. If you rent the house 200 days of the year, you can spend 20 days there (10% of 200). If you go over by a day or two, you don’t suddenly lose all tax benefits, but you do have to allocate rental expenses between rental and personal use.
     There is a little loophole. Any day that you spend working substantially full time repairing and maintaining (not improving) the property is not counted as a day of personal use. The IRS is picky on this, stating that 3–4 hours of maintenance followed by recreational activities does not qualify, so I'd keep good records of maintenance days—what you did, hours worked, receipts, materials purchased, etc.
     If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 50 years. The opinions expressed here are his and do not necessarily represent his affiliated organizations.