The appeal and reality of multiple home ownership
Important rental, tax and retirement considerations to consider.
The joys of a vacation home, or owning multiple homes in your favorite locations, are many. Spending time with loved ones, in locales near and dear to your heart is a worthwhile pursuit. But of course, they come with maintenance and other considerations, including red tape.
No doubt you’ve figured out who you can trust in each locale – drafting a team of reliable contractors, home repair and other vendors needed to maintain the property and prepare it for your arrival. There are many ways to do this from formally hiring a house manager at each location, to managing the details yourself from afar with the trusted team you’ve built over the years. These processes no doubt work well for your personal use – but what else will you need in place to rent the property while you’re not there?
That’s where local property managers, real estate agents and even your core team of contractors can help. If you want to monetize your property while away for short- or long-term rentals, there are some general considerations and tax implications you’ll want to explore.
How to find tenants
Local real estate agents who know the market intimately, and have access to networks of potential renters who might be looking for high-end housing in-between purchasing a home, can be a good source for reliable renters. They’ve likely mastered the prevetting process, and the art of helping you find qualified, responsible tenants by conducting background checks and more. Often an agent has access to a variety of property management and other teams who can help smooth the process locally. Check regulations in the town where your property is to make sure the house is up to rental code. Some towns or cities might require a rental license and inspection for long-term rentals.
Entering the short-term market
Short-term rentals have higher income potential, but require more handholding – something you will really want to consider if hosting from afar. Design services to showcase the property at its best and command top dollar are often required to enter the high-end short-term rental market. Cleaning services, quick response times and turning over the property at a high volume between guests require people on the ground near the rental. You’ll also need to have your attorney check regulations and requirements on short-term rentals as municipalities can differ even from state or federal regulations. In order to protect your property, you will want to have appropriate insurance coverage in place. Liability insurance for short-term rentals is very different than typical homeowner policies. If you have anything on your property that might fall under an attractive nuisance law, like pools, play equipment or even construction on part of the home or property, you’ll want to speak to your insurance broker about a policy to help mitigate risk. And finally, you may want to consider a home warranty policy to help offset the cost of major repairs or appliance replacement. Home warranties are designed to protect appliances and systems from breakdowns caused by normal wear and tear. Liability insurance pays for damages and loss caused by unexpected events such as fire and weather damage, but it won't help if a washing machine breaks down.
Whether or not you will be renting, there are tax considerations that come along with owning multiple homes. First is which home you consider your primary domicile, essentially your home base where you hang your hat. This can encompass a wide variety of factors outside of where you spend the most time, including where your pets reside, if you travel for work, and other considerations. Your domicile will determine in which state you pay income taxes, and you’ll be responsible for any normal property tax.
There are also standard federal deductions on the interest on your home mortgage. Before the Tax Cuts and Jobs Act, the mortgage interest deduction limit was $1 million. Today, the limit is $750,000, but there could be those who still qualify for the $1 million level depending on when they bought the property, and improvements and property taxes. You can deduct up to $10,000 in property taxes each year, but that $10,000 limit also includes whatever state and local taxes you may be looking to deduct. (Ex: If your property tax bill comes to $8,000 but you’re deducting $4,000 in state taxes, it means you can only deduct $6,000 of your property taxes.) Talk with your tax professional about these factors to make sure you’ve clearly established the domicile of your choice for an optimal tax strategy. Secondly, if you do rent your property, you’ll need to walk through the tax implications here as well. You’ll have an opportunity for greater deductions as a home rental, but you also may be subject to higher income tax.
Finally, have a budget for maintenance, property upkeep and any associated costs as well as a plan as to where you want to channel any profits. Your advisor can help you allocate these funds and make sure any residual profits are put to work.
Monetizing multiple homes is doable – and can be profitable. Consider not only the tax implications but how your homes fit into your overall investment strategy – and how much work you want to put into turning your homes into an income stream.
Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
Sources: roofstock.com; businessinsider.com; bdo.com; nyt.com; latimes.com; worth.com; cnbc.com; jjburns.com