My two sisters and I inherited a house on Cape Cod. We spent our childhood summers in this house and don't want to sell it, but neither do we want to spend our own money on upkeep. So we decided to make it into a rental property (we formed an LLC) and reserve a few weeks in the summer each year for personal use. We're not that concerned with whether we end up with a profit. We'd be very happy just to break even.
We had a bunch of initial expenses - lead testing revealed we had to replace all the windows and the oil furnace died so we are in the process of upgrading it to natural gas. We're planning on starting to rent in late August, for an 11 or 11.5 month lease.
Things are mostly in hand, except as I've been learning about the financial/tax end of things, the big question I have found I need to answer is how many days we can use the house for personal use. I've read IRS pub 527, and I know it's important whether the house is considered a Home. What I don't understand that well is capitalization and depreciation and what the consequences are of exceeding the number of days that would make the property a Home. What are the tax consequences?
For 2015, probably the most we could hope to rent the house for is 120 days. Thanks for any help.
If it is in a vacation area, make it a vacation rental. You could potentially earn more with a short term rental and have more flexibility to book it for yourselves. I can't imagine it would be easy to find tenants who would want an 11 or 11.5 month lease, unless you are near a university.
Also, accept the fact that some furnishings will wear out or get broken. Contract with a vacation property rental agency to handle the bookings, cleaning, maintenance/repair.
Jerry, welcome to Bigger Pockets! There are significant tax benefits to utilizing the house as a vacation rental as opposed to a second home. Generally if you can keep your personal use to under 14 days per year, then you can deduct many rental expenses, including mortgage interest, insurance, property management, taxes, utilities & depreciation. This topic comes up frequently in the forums, but if you want a good, quick summary, check out the link below:
We own a rental house in East Falmouth and have great success managing this as a vacation rental. We use it for a week in August and 1-2 other weekends during the year, staying under the 14 days annually. You should look it up to be sure, but you are allowed to use the house additional days when you are working on the house.
Good luck with the rental!
Thanks for the replies.
Marcia - yes, it's in a vacation area, and the realtor has advised us weekly renters are much pickier and the house would need a bunch of upgrades to appliances, etc, to make them happy. The problem is that I live in PA, almost 400 miles away, so I wouldn't be able to be there for the kind of small issues that arise with short term renters. We are near a large scientific institution (several, actually), and the realtor we're using to locate tenants thinks a yearly rental won't be a problem.
Jonathan - so depreciation is one of my big questions. If the house is a home, does this mean we cannot take the window replacements as depreciation? So we'd only be able to take them as an expense for this year and we'd be limited to the amount we took in in rental and lose the rest? If that's the case, then ouch, things are starting to make sense.
It's my understanding that if we pay the LLC something close to fair market value for the time we stay there for personal use, it's not considered personal use. Is this correct?
Not that I would do this, but how would the IRS even know whether we used the house?
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