Thinking about renting out your vacation home

Dec 28, 2023

Renting out your vacation home can be a lucrative way to make some extra cash, but it's important to consider two key factors before taking the plunge: how many days you plan to use the property for personal use, and whether you’re retaining control over its use.

Both of these will be important information for your CPA, the IRS and your home lender when looking to finance the property. First, it's crucial to determine how many days out of the year you’ll be using the property for personal use. If you plan to use it frequently, you’ll need to weigh the potential income from renters against your own enjoyment of the property. While it may be tempting to rent out the home as often as possible to make the most money, be realistic about how often you’ll actually be using it.

In order to deduct the mortgage interest on your vacation home as, "qualified home mortgage interest," you need to follow a common rule of thumb, which is the "14-day rule." This stipulates that if you use the property for more than 14 days (or 10% of the time it's rented, whichever is greater), you may be able to deduct the mortgage interest, however you may not be able to deduct all of the rental expenses on your taxes. This means you’ll need to calculate your potential rental income carefully and factor in how the personal use of the property may impact potential tax benefits. Always best to consult with a tax professional so that you know how to best put the property to use.

Additionally, bear in mind that frequent personal use may limit the availability of your vacation home to renters. If you plan to use the property for several months out of the year, it may be more challenging to find renters to fill the gaps when you’re not there. Conversely, if you don't plan to use the property often, you may be able to rent it out more frequently and generate higher income.

The second factor to consider is whether you’re retaining control over the use of the property. As the homeowner, you will want to know what flexibility you have to personally use the property. For a home lender this is important that you don't relinquish firm control over to a third party company. If so, the property may be considered an investment property instead of a vacation home for lending purposes.

If renting you will also need to decide if you want to manage the property yourself for short-term rentals or work with a property management company. Handling it yourself can be more work than you anticipate. You’ll need to handle the booking process, collect fees, communicating with renters and handling the frequent cleaning of the property. It may be more convenient to hire a property management company that already have these processes in place so that you can enjoy the property when you use it.

Ultimately, the decision about how much control to retain comes down to your personal preferences and financial goals for the rental property. By carefully weighing these factors and doing your research, you can make an informed decision and maximize the potential of your vacation rental.

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