by Tom Kelly, Inman News
It’s the time of year for weddings in faraway churches and family reunions in relaxing places. Perhaps friends (or friends of friends) have approached you about renting your home or vacation cabin when you are not using it this year. And, they are willing to pay — an amount in line with the best rental properties in the area.
Do you have to declare the income to the Internal Revenue Service on your annual income tax return? How much is too much before crossing into different tax threshold?
While many families don’t charge a fee for letting friends use their home or getaway retreat for a special gathering (hoping they’ll return the favor when YOUR child gets married) you can pocket any fair-market rent as long as the term is 15 days or fewer and you don’t claim any of the tax deductions typically allowed on rental property, such as for depreciation or maintenance.
This option can come in handy for folks who do not want to be in the rental game, yet occasionally find they could rent their place. It happens all the time for annual golf tournaments, arts fairs, theatre festivals, auto races and jazz carnivals.
The rules change, however, if the getaway house becomes a designated rental or investment property. Under current federal tax laws, the owner can still use a rental vacation home for 14 days or 10 percent of the amount of time the house is rented, whichever is greater, without jeopardizing its status as a rental property and tax shelter.
The owner who designates his cabin as an investment property and rents “full time” is getting three benefits: First, the renters are buying the house for him. Second, he can cash in on any appreciation that might result from rapidly increasing property values. And third, he can depreciate the building — not the property it stands on — which can provide substantial tax benefits.
Depreciating an asset means you are taking a deduction for the value lost as an asset ages. According to the accounting firm of Ernst & Young LLP, the period of time over which you depreciate your property has long been the subject of controversy. Often, it depends upon when the property was put “in service.”
Investors in vacation homes must use the tax benefits from depreciation to cover their costs. What is left for them then is profit made from the appreciation in the value of the property.
The 14-day maximum-personal-use rule means a house at the ocean with a 90-day rental season can be owner-occupied for 14 days, instead of the nine days that would be allowed under the 10 percent rule. With longer rental seasons, however, the 10 percent rule can be a bonus.
For example, a mountain resort home near winter ski slopes and summer lakes might be rented for 250 days a year, allowing the owner to use it for 25 days. Personal use does come at a cost. Depreciation is limited only to the percentage of time that a house is rented. If you rented for 90 days and use it yourself for 10, you can take only 90 percent of the total expenses and depreciation.
But another way to catch a few hours at the beach without eating into or exceeding the 14-day or 10 percent limit is to clean the house yourself between renters. Days spent maintaining the house do not count toward the personal-use limit. And you can deduct travel costs to get to the house and expenses such as paint and cleaning supplies.
However, if the IRS determines that you were at the house more to sit in the sun than to clean the bathrooms and paint the porch, those days may be added to your personal use and could jeopardize your tax savings.
The house also must be rented at fair market value. If you rent to relatives at discount rates, the IRS may rule that the house is not actual rental property and disallow many of your deductions.
Rent to relatives at discount rates? (I would consider tacking on a premium for a couple of my nephews.)
To get even more valuable advice from Tom, visit his Second Home Center.What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
Copyright 2008 Tom Kelly
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Tags: renting+your+home+for+vacation, pocketing+rental+income, real+estate+tax+tips, apartment+owners+associations, landlords
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[...] Reverse Mortgage for Buyers Debuts by Tom Kelly, Inman News Reverse mortgages have been available for more than two decades for older homeowners who have accrued a significant amount of equity in their homes. Now, the government is backing a program to help older homeowners purchase a home with the increasingly popular financing program.The Federal Housing Administration, a component of the U.S. Department of Housing and Urban Development, insures the nation’s most popular reverse mortgage known as the Home Equity Conversion Mortgage, or HECM. The Housing and Economic Recovery Act of 2008 recently approved the HECM-for-purchase program, allowing lenders to close the mortgages after Jan. 1, 2009. The move allows older homeowners to make a large down payment on a new home and then utilize the reverse mortgage as permanent financing. The same law reduced the maximum loan fee on reverse mortgages to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower.A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free.“The HECM for purchase will give seniors several more options,” said Sarah Hulbert, president of Senior Financial Corp., a reverse mortgage lender. “I think one of the key aspects is that they can stay more liquid. They do not have to reinvest all of their funds into their new home before getting the reverse mortgage, freeing up more cash for other uses.”For example, if a 70-year-old homebuyer wanted to purchase a $300,000 home, he or she could put approximately $123,000 down and finance the balance of $177,000, plus closing costs, with a reverse mortgage. The buyer would make no monthly payments for as long as he or she maintained the home as a principal residence.Interest and MIP (Mortgage Insurance Premium) accrue on the initial loan amount and become due when the borrower, or surviving spouse, dies, moves or sells the home. The current annual percentage (APR) for the monthly adjusted HECM 200 is 3.62 percent (including the government’s 0.5 percent annual mortgage insurance). When refinanced, the APR for the program has averaged approximately 6.5 percent for the past 15 years. Eligible properties include:1- to 4-unit single-family homes Manufactured homes, built after June 15, 1976, that meet HUD’s permanent foundation guidelines Condominiums“I think you will see the typical purchaser for a HECM will be the move-down buyer — perhaps headed to the sunshine,” said former Puget Sound resident Ken Keranen, who now originates reverse mortgages for Seniors Reverse Mortgage in Carlsbad, Calif. Customers interested in the HECM for purchase must enroll in a HUD counseling class. Borrowers may not obtain a bridge loan (also known as “gap financing”) or borrow against other assets for the down payment or closing costs. This restriction includes personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing.Lenders will be required to verify the source of all funds prior to closing. A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts. If there is a large increase in an account or the account was opened recently, the lender must be able to obtain a credible explanation of the source of those funds.To avoid cases of property flipping, lenders must take steps to ensure that: a) only current owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) FHA will require additional documentation validating the property’s value for resale that occurs between 91 and 180 days where the new sales price exceeds 100 percent of the previous sales price.More than 450,000 HECMs have been made since 1989, the year FHA launch its reverse mortgage pilot program. FHA insured approximately 112,000 HECMs in fiscal-year 2008, up from 107,367 HECMs in 2007 and 43,131 in 2005.The only challenge seniors now face in this slow market is finding a willing buyer to purchase their present home so they can “move down” via a reverse mortgage. After all, you have to sell your primary residence before you can buy another one.What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.Copyright 2009 Tom Kelly See Tom Kelly’s feature, Put Part-Time Rental Cash in Your Pocket. [...]