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.
The IRS makes specific distinctions between an investment property and a vacation rental property:
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.
The Tax Cuts and Jobs Act changed the landscape of taxes for second home owners and how they can take deductions. Specifically:
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.
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.
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:
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:
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.
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:
Vacasa offers property management and other real estate services directly and through licensed subsidiaries, including Vacasa Arizona LLC; Vacasa Alabama; Vacasa Florida; Vacasa Hawaii; Vacasa Louisiana LLC; Vacasa Michigan LLC; Vacasa Montana; Vacasa Nevada LLC; Vacasa New Hampshire LLC; Vacasa New Mexico LLC; Vacasa Pennsylvania LLC; Vacasa Tennessee; Vacasa South Carolina LLC; Vacasa Resort Rentals of Hilton Head Island LLC; Vacasa Virginia LLC; Vacasa Wisconsin LLC.