Author Topic: Switch vacation home to rental - do anything differently  (Read 756 times)

retired?

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Switch vacation home to rental - do anything differently
« on: February 14, 2020, 07:32:51 AM »
I have a vacation home that I will not be able to use for several years, so I have a few options:

 - sell
 - rent and then sell
 - rent and then move in (it's in a possible final retirement location... one reason I would like to keep it)

Bought it for 210, now worth about 300.  It would need a little bit of work to rent (replace deck), but not too much.  So far, been treated as a second home with only interest and tax deducted (but not last few years since not enough itemized deductions).  Would the cap gains be treated differently in either of the above cases, or would 210 be basis regardless?  Is there a way to recognize current cap gain before putting to work as a rental?

Trying to understand any issues of converting a home from rental status that is not a new purchase and a rental from the outset.  TIA.

retired?

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Re: Switch vacation home to rental - do anything differently
« Reply #1 on: February 15, 2020, 10:16:50 AM »
Anybody?

SeattleCPA

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Re: Switch vacation home to rental - do anything differently
« Reply #2 on: February 15, 2020, 11:19:16 AM »
Three comments...

First, and this is a professional opinion, vacation homes can work really well as tax shelters. Most info you need to think about this issue covered in my blog post here: https://evergreensmallbusiness.com/vacation-rental-tax-shelters/

Second, and this is not really a professional opinion but more of a casual remark, I have the sense that to really make the economics work, you need to be really serious about this. E.g., lots of folks appear to justify a second home through  that rental income they'll earn... I doubt that works or works easily. I bet to really make the numbers work--as with any small business--you need to be really business like, etc.

Third comment: You'll have a lot of stuff in the house to depreciate. The basis of that stuff will be lower of original cost or fair market value at point you convert to rental.

P.S. Here's IRS page on topic: https://www.irs.gov/taxtopics/tc415

P.P.S. It might be helpful to know the code section too: Section 280A

Car Jack

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Re: Switch vacation home to rental - do anything differently
« Reply #3 on: February 18, 2020, 06:46:03 AM »
Part of your decision should figure in your work vs what you get back.

Likely, you'll be going to the place to clean/repair between rentals.  I have friends who did this thinking "oh, I get to have a nice place on Cape Cod to vacation for free and renters will pay for it" which became "all the times I'd like to be there are rented and I really can't afford to let the rents go if I want to pay for it so I guess I'm going to sun myself on the beach in November when it's 38 degrees out".  Since you already own it, you don't have the buy in costs.  But you also don't have to go at all between times you're there for vacations.  Figure the extra tax figuring work into all of this.  For either tax or cleaning/repairs, if you don't do it yourself, they are expenses.  Some you can write off, I guess.

I like to compare to a complete sell off.  Now you have money you can put into index funds.  You no longer have to go clean after someone else, chase rent payment or puzzle over taxes (or higher insurance costs....or re-mortgage to a rental).