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To rent out vacation home or not?
Old 03-16-2019, 12:37 PM   #1
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To rent out vacation home or not?

Wife and I purchased what we want to be as our retirement home. We will retire in about 7 years. It is a 2 br 1000 sqft townhouse with lakefront. We go there about a week every other month and love it. But my monthly costs are about $1200 which includes everything from mortgage to poa dues. We have rented it out using a management co. and have yet to make a profit from the rental proceeds. It is rented as a short term rental although i have rented for a month at at time. It is located in hot springs village AR. which is a very popular place to visit. I know that i can write it off as a loss and help lower my primary job income which then i pay less taxes, but is it really worth renting it out since if i ever sell it i have to pay a 25% tax recapture from the depreciation i have claimed on it. For now we don't see a reason to sell anytime soon. Is there any other advantages to renting it out that i am not seeing. I hear allot of people making money from rentals but don't see how i am going to do it. My place is priced competitively and rents out more than any other in my area. Any words of wisdom, any suggestions on how to sell in the future and not have to pay the depreciation tax i claimed. Thanks
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Old 03-16-2019, 12:47 PM   #2
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I don't know what you mean when you say "make a profit"...what do you consider profit.

Do you have real numbers so we know what you are asking about.
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Old 03-16-2019, 01:24 PM   #3
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We bought our vacation home almost eight years ago, and have never rented it out. We made sure we bought a place we could afford without having to rent it out, because we wanted it to be "home", not a place we visited when other people weren't there.

No one else is ever in the house (except once or twice a year when one of the DD's uses it for a weekend with her friends), so we don't have to worry about locking up our personal stuff. We leave clothes there, non-perishable food, eggs in the refrigerator. We only have to change the sheets when we've slept on them enough, not every time we stay.

However, we have always used the vacation house more than you are using yours. When we bought it, we were still w*rking so would go up on weekends. Usually 1-2 weekends/month in the winter and 2-3 weekends/month in the summer. Now that we don't have j*bs, we live at the lake house from May to September and spend a couple of days there a few times a month in the winter.

I guess we always have considered the vacation house a lifestyle choice, not an investment.
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Old 03-16-2019, 01:40 PM   #4
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Originally Posted by Philliefan33 View Post

I guess we always have considered the vacation house a lifestyle choice, not an investment.
Same here. Although it has appreciated nicely. Not interested in renting it. I let a neighbor use it once when he had extra family to visit. But that's it as I bought it for me and occasional use by close relatives.
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Old 03-16-2019, 02:11 PM   #5
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When you say "never a profit", I think you are better off examining what you net of your rentals are after expenses (forget depreciation, it is just tax deferral). Gross income less (Commissions, Utilities, Marketing, Extra repairs, Linens, Etc). This is how YOU really benefit from renting it. Look at this number: Is it worth it?
These are actually "real" dollars, that are lowering your TCO for the 'vacation' home.

I have done this analysis for my own 2nd home and what my analysis showed me was the best options were (no order):
A. Rent out full time and keep my personal use under the 10% / 14 days rule. Has most income and tax benefits.
B. Rent out two weeks max (14 days specifically)per year and take the tax free income to subsidize my vacation home. Works great if you want to take a two week vacay during high season elsewhere!
C. Don't rent out at all and keep it like you want it....and pay for the whole thing.

The option that does NOT work because of tax complications, is to rent it out say 1/2 time and use it 1/2 time as a vacation home. You get ZERO loss deductibility, have to prorate expenses in a not so great way, and the depreciation you take gets recaptured. My own analysis showed there was little benefit from going "tax free two weeks" in high season to "taxable 6 weeks" in high season.

If you do rent full time, you can eliminate time spend on repairs and maintenance, as well as a single annual "inspection" visit from the 14 day rule.

Hope this helps.
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Old 03-16-2019, 03:44 PM   #6
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Originally Posted by ivinsfan View Post
I don't know what you mean when you say "make a profit"...what do you consider profit.

Do you have real numbers so we know what you are asking about.
Which #s do you want, do you want a break down of each monthly bill?

I guess i am not sure of what is considered a profit. In a perfect world i would not want to put in any additional monies on top of the rental proceeds to cover the monthly expenses. But i don't know if that is how the rental business works. Maybe when owners of rentals say they made a profit they are excluding the mortgage and are figuring in appreciation of the property, i am not sure.
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Old 03-16-2019, 03:48 PM   #7
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Originally Posted by Philliefan33 View Post
We bought our vacation home almost eight years ago, and have never rented it out. We made sure we bought a place we could afford without having to rent it out, because we wanted it to be "home", not a place we visited when other people weren't there.

No one else is ever in the house (except once or twice a year when one of the DD's uses it for a weekend with her friends), so we don't have to worry about locking up our personal stuff. We leave clothes there, non-perishable food, eggs in the refrigerator. We only have to change the sheets when we've slept on them enough, not every time we stay.

However, we have always used the vacation house more than you are using yours. When we bought it, we were still w*rking so would go up on weekends. Usually 1-2 weekends/month in the winter and 2-3 weekends/month in the summer. Now that we don't have j*bs, we live at the lake house from May to September and spend a couple of days there a few times a month in the winter.

I guess we always have considered the vacation house a lifestyle choice, not an investment.
I can afford it that is not the issue, and i have no intentions of selling because of the bills. I just wanted to know if it is worth renting for the write offs or not rent so i don't have to repay the depreciation write off of 25% later if and when i do sell. My tax bracket is around 10% so to pay 25% later is a stinger.
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Old 03-16-2019, 03:49 PM   #8
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When you say "never a profit", I think you are better off examining what you net of your rentals are after expenses (forget depreciation, it is just tax deferral). Gross income less (Commissions, Utilities, Marketing, Extra repairs, Linens, Etc). This is how YOU really benefit from renting it. Look at this number: Is it worth it?
These are actually "real" dollars, that are lowering your TCO for the 'vacation' home.

I have done this analysis for my own 2nd home and what my analysis showed me was the best options were (no order):
A. Rent out full time and keep my personal use under the 10% / 14 days rule. Has most income and tax benefits.
B. Rent out two weeks max (14 days specifically)per year and take the tax free income to subsidize my vacation home. Works great if you want to take a two week vacay during high season elsewhere!
C. Don't rent out at all and keep it like you want it....and pay for the whole thing.

The option that does NOT work because of tax complications, is to rent it out say 1/2 time and use it 1/2 time as a vacation home. You get ZERO loss deductibility, have to prorate expenses in a not so great way, and the depreciation you take gets recaptured. My own analysis showed there was little benefit from going "tax free two weeks" in high season to "taxable 6 weeks" in high season.

If you do rent full time, you can eliminate time spend on repairs and maintenance, as well as a single annual "inspection" visit from the 14 day rule.

Hope this helps.


I was pleasantly surprised of the tax benefits we got from renting our beach house for five weeks, even though we were there more than 14 days. We spend 26 days of play time and another two weeks fixing it up. The rent paid for our property taxes, insurance, a new front door, getting the poorly installed ducting up to snuff and paid for a tankless water heater and landscape maintenance. We didnít have to pay any tax on the rent this year. I expect to pay some in the future, but not much. The property tax, insurance and landscape maintenance will be a regular expense. Our intent of renting was to cover our expenses. We didnít plan on profit. As far as recapture of the depreciation, we plan on holding the property and passing it onto the kids, so itís not an issue for us.
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Old 03-16-2019, 06:19 PM   #9
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Which #s do you want, do you want a break down of each monthly bill?

I guess i am not sure of what is considered a profit. In a perfect world i would not want to put in any additional monies on top of the rental proceeds to cover the monthly expenses. But i don't know if that is how the rental business works. Maybe when owners of rentals say they made a profit they are excluding the mortgage and are figuring in appreciation of the property, i am not sure.
No...did you want your rental to cover all carrying costs for your condo including mortgage payments or did you want the rentals to cover the monthly expenses excluding mortgage. It's the word profit that thru me. I think most people think cash flow when it come to renting a second home.

I suspect one of your "profit" problems is using the management company, their fees are never cheap.
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Old 03-16-2019, 06:59 PM   #10
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We've rented a vacation home for a week a few times. Nice. Then we left & forgot all problems with it.
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Old 03-16-2019, 10:09 PM   #11
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No...did you want your rental to cover all carrying costs for your condo including mortgage payments or did you want the rentals to cover the monthly expenses excluding mortgage. It's the word profit that thru me. I think most people think cash flow when it come to renting a second home.

I suspect one of your "profit" problems is using the management company, their fees are never cheap.
The management co does charge 30%, but i have it listed on a few sites with a discounted rate if they go thru me. But the management co still brings in 90% of the renters. I have people at work interested and i give them the disc price plus no tax or cleaning fee if they pay cash. Most of them go thru the management co because they are cash poor.

I would be happy with all costs minus mortgage but i fall short of that on average.
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Old 03-17-2019, 04:54 AM   #12
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Since you havent provided any numbers, lets say you're monthly costs are $1200...and you're bring in $1000 from renting it out (that you get to keep)...is that a bad thing?
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Old 03-17-2019, 06:32 AM   #13
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Since you havent provided any numbers, lets say you're monthly costs are $1200...and you're bring in $1000 from renting it out (that you get to keep)...is that a bad thing?


If we assume the house is worth $200K: $220K/27.5 = $7227 depreciated each year it is rented. If he nets $1 per month before depreciation thatís $4227 profit per year. After 10% tax thatís roughly $4300 in his pocket per year.

If he rents the place out for eight years, thatís $57,800 to be recaptured at 25% tax = $14,454. Ignoring inflation, thatís lowering his yearly profit to $2500.

If the house is worth $350,000 the yearly depreciation is $12,700 and the only benefit of renting is current cash flow.

Either way, I wouldnít rent out the house if I I didnít need the cash flow now. Itís not worth the hassle and extra wear& tear on the property.
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Old 03-17-2019, 07:23 AM   #14
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The management co does charge 30%, but i have it listed on a few sites with a discounted rate if they go thru me. But the management co still brings in 90% of the renters. I have people at work interested and i give them the disc price plus no tax or cleaning fee if they pay cash. Most of them go thru the management co because they are cash poor.

I would be happy with all costs minus mortgage but i fall short of that on average.
If you are not covering the basics excluding mortgage you probably need to raise the price...just raise the price enough to cover these items and see if you still get traffic.
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Old 03-17-2019, 08:11 AM   #15
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I rented out my vacation home directly. I was paying $1350 mortgage and $150 for elect/gas, water was deep well, so about $1500 monthly cost. I made about $1300-$1500 a month .. almost break even. I sold it, because I was tired maintaining it .. log cabin with 3 acres .. beautiful mountain views
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Old 03-17-2019, 12:36 PM   #16
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Since you havent provided any numbers, lets say you're monthly costs are $1200...and you're bring in $1000 from renting it out (that you get to keep)...is that a bad thing?
1200 is everything including mortgage, mortgage is 585. I still fall short of my rental proceeds to cover the 615 balance. I think i make up the difference in the write offs but in the end when i sell i will have to pay back the depreciation at a fixed 25%.
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Old 03-17-2019, 12:40 PM   #17
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If we assume the house is worth $200K: $220K/27.5 = $7227 depreciated each year it is rented. If he nets $1 per month before depreciation thatís $4227 profit per year. After 10% tax thatís roughly $4300 in his pocket per year.

If he rents the place out for eight years, thatís $57,800 to be recaptured at 25% tax = $14,454. Ignoring inflation, thatís lowering his yearly profit to $2500.

If the house is worth $350,000 the yearly depreciation is $12,700 and the only benefit of renting is current cash flow.

Either way, I wouldnít rent out the house if I I didnít need the cash flow now. Itís not worth the hassle and extra wear& tear on the property.
That is what my wife thinks, but she is not paying for it. I on average bring in 500 per month with 615 in bills minus mortgage, repairs, upgrades, and people steeling stuff.[/LIST].
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Old 03-17-2019, 12:42 PM   #18
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If you are not covering the basics excluding mortgage you probably need to raise the price...just raise the price enough to cover these items and see if you still get traffic.
I could try, but there are 6 rentals in just my block. 2 are on the water just like me. I would have to raise it to their prices and they have 3br 2 bath sleep 6, i have 2br 1.5 bath sleep 4. So people may just pay the same price for a bigger place with same view.
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Old 03-17-2019, 09:37 PM   #19
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You have to consider what you want out of the property. Do you just want it to return income? Then you should have bought based on likely return on investment and not where you might want to live one day. Not easy to look a a property and say “I would never live here, but it should make money” and buy it. We tend to buy wha we personally like...

If you use it when not rented and that was important, what is that “free vacation home” worth?. If you bought it for retirement, what Will it likely cost at retirement. Did you get it for much less now, then you need to factor that savings in against the expenses.

If it is appreciating rapidly you can always sell it using a 1031 deferral and reinvest without paying any capital gains.
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Old 03-18-2019, 12:32 AM   #20
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When you say "never a profit", I think you are better off examining what you net of your rentals are after expenses (forget depreciation, it is just tax deferral). Gross income less (Commissions, Utilities, Marketing, Extra repairs, Linens, Etc). This is how YOU really benefit from renting it. Look at this number: Is it worth it?
These are actually "real" dollars, that are lowering your TCO for the 'vacation' home.

I have done this analysis for my own 2nd home and what my analysis showed me was the best options were (no order):
A. Rent out full time and keep my personal use under the 10% / 14 days rule. Has most income and tax benefits.
B. Rent out two weeks max (14 days specifically)per year and take the tax free income to subsidize my vacation home. Works great if you want to take a two week vacay during high season elsewhere!
C. Don't rent out at all and keep it like you want it....and pay for the whole thing.

The option that does NOT work because of tax complications, is to rent it out say 1/2 time and use it 1/2 time as a vacation home. You get ZERO loss deductibility, have to prorate expenses in a not so great way, and the depreciation you take gets recaptured. My own analysis showed there was little benefit from going "tax free two weeks" in high season to "taxable 6 weeks" in high season.

If you do rent full time, you can eliminate time spend on repairs and maintenance, as well as a single annual "inspection" visit from the 14 day rule.

Hope this helps.
1+.
Also, look into ditching the rental company-cut out the middleman. We used VRBO to advertise our former place and were pleased.

Take the entire rent up front. Keep the security deposit until you personally visit and confirm (we used a 45 day period in our lease). This entire process requires two visits, one a day or so before guests arrive (to tidy up the place) and a visit afterwards. But it sounds like you would enjoy stopping by anyway. (Ask your CPA if before and after visits count towards your personal 14 day usage.)

BTW, if you plan on retiring there, recapture of depreciation should be a non-issue. Plus, tax law can change in the next few decades.
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