Vacation rental tax rules, insurance, and permits

Essential information for vacation home owners and buyers

Like mortgages, tax rules will be a little different for a second home, especially if the home is an investment property. If you’re planning to buy a vacation home, it’s a good idea to find a financial consultant who can help you get the most out of your rental income.

Investment property taxes vs. vacation rental taxes

The IRS makes specific distinctions between an investment property and a vacation rental property:

  • An investment property is one that you don’t use, but rent out to someone else.
  • A vacation rental is one that you use some of the time—you occupy the home for more than 14 days a year (not including any days you spend making improvements to the property), or 10% of the total days you rent it out per year.

Investment property income can be taxed differently than vacation rental income, since expenses for an investment property are considered business costs rather than personal spending.

There is also a special rule for the inverse, known as Minimal Rental Use: If you only rent your second home out 14 days per year, then you don’t need to claim the rental income or get to deduct any “rental expenses”. Otherwise, you'll need to claim income from your vacation rental.

When you’re preparing your taxes for your vacation rental, you’ll need to divvy up the expenses between rental use and personal use. And you may be limited on which deductions you can take, such as property taxes, mortgage interest, and Realtors’ fees.

2018 tax updates

The Tax Cuts and Jobs Act changed the landscape of taxes for second home owners and how they can take deductions. Specifically:

  • A new cap on mortgage interest deductions for second homes: The new law lowers the amount of mortgage interest (including interest on a second home) a homeowner can claim from $1 million to $750,000.
  • A new cap on property taxes: This deduction is now limited to $10,000 for property, state, and local income taxes on all properties.

If your second home is designated as a vacation home, the best way to maximize your deductions (not to mention your income) is to rent your home out as much as possible. If you only use the home two weeks a year (not counting days you spend improving the property), then the income you generate is still considered taxable.

Vacation home insurance

If you rent out your second home, you’ll need a policy that covers vacation rental use of your home instead of regular homeowners insurance. Always discuss your options with a professional insurance provider so that you are adequately covered and can find the best policy for you.

Homeowners insurance vs. vacation rental insurance

Let’s say you have friends over for a barbecue. One of them is leaning against the porch railing when it suddenly comes loose, causing them to fall off the porch and injure themselves. Your homeowners insurance would likely cover any medical expenses and potentially any legal expenses.

Classic homeowners insurance covers:

  • Dwelling: Damages resulting from things like fire, wind, and hail.
  • Other structures: Damage to things like sheds or detached garages.
  • Personal property: Reimbursement for damaged furniture or electronics.
  • Liability: Protection in the case of guest injury or a claim against you.

Because a vacation rental is considered a “business” (your guests are paying you to use your home), anything that occurs during a guest’s stay would be considered commercial activity. So if a similar scenario played out at your vacation home, you’d be held liable as a business owner and would require a different policy.

Insurance that covers vacation rental activity will often be an additional cost (and may have to come from a different insurance provider). We’ve partnered with Assurant to provide comprehensive yet affordable protection for Vacasa homeowners. Assurant’s coverage includes:

  • Ample liability coverage: If a guest is injured on your property and sues, this will help protect you from any ensuing medical or legal expenses.
  • Coverage for minor damages: Things you may normally pay out of pocket in a primary home—a wine spill on the carpet or broken dishware, for example.
  • Damage protection: A good thing to have just in case there’s any damage by guests to your property (like a broken window).

In addition, special natural disaster insurance may be necessary for homes in flood, tsunami, or hurricane paths, or for homes in areas susceptible to earthquakes.

Vacation rental permits

Depending on where you buy your vacation home, the area may require specific permits in order for your vacation home to be considered legal. A good vacation rental management company may help you navigate the legalization process. Otherwise, you should speak with the local county or city officials to learn what is necessary.

Check to see if you need any of the following in order to operate a vacation rental:

  • Business licenses
  • Vacation rental permits
  • Transient occupancy tax certificates
  • State licenses
  • Tax registrations with the state tax collector or the Department of Revenue

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Vacasa offers property management and other real estate services directly through Vacasa LLC and through Vacasa LLC's licensed subsidiaries. Click here for more information about Vacasa's licensed real estate brokerage/property manager in your state. Vacasa’s licensed real estate brokerages/property managers include: Vacasa Alabama LLC; Vacasa Arizona LLC; Vacasa Florida LLC; Vacasa Louisiana L.L.C. (licensed in Louisiana); Vacasa Michigan LLC 947-800-5979; Vacasa Nevada LLC; Vacasa New Hampshire LLC, 603-782-9591, Michael Scanlan, Principal Broker, 314 Lafayette Road, Suite 1A, Hampton, NH 03842; Vacasa New Mexico LLC, 503-345-9399; Vacasa New York LLC, 888-433-0068; Vacasa North Carolina LLC; Vacasa Pennsylvania LLC; Vacasa Real Estate LLC (licensed in Colorado 720-727-9358, Idaho, and Oregon); Vacasa Resort Rentals of Hilton Head Island LLC; Vacasa South Carolina LLC; Vacasa Tennessee LLC; Vacasa Vacation Rentals of Hawaii LLC, 3350 Lower Honoapiilani Road, Suite 600, Lahaina, HI 96761; Vacasa Vacation Rentals of Montana LLC, Rickie Miller, Licensed Property Manager; Vacasa Virginia LLC; Vacasa Wisconsin LLC.