Vacation Home or White Elephant?

June 15, 2009
Special Feature

When the real estate bubble burst, many vacation home owners found themselves with a house worth far less than what they paid for it along with dwindling reserves to finance its upkeep.

Back in the heady days of easy mortgage money, vacation homes were among the hottest sellers in real estate. Affluent buyers bid up prices to land that dream house by the seashore, in the mountains, or near a championship golf course. When the real estate bubble burst, many vacation home owners found themselves with a house worth far less than what they paid for it along with dwindling reserves to finance its upkeep. They now are wondering what to do about it.

One option is to sell and take the loss. Another is to wait until the market comes back, which unfortunately may take years, according to some real estate professionals. But homeowners who choose the second option can also find ways to ease some of the financial pain of owning that vacation home while they’re waiting. One way to turn a vacation home from a cost center to a revenue center is to rent it. If the rental is limited to two weeks a year, the income doesn’t have to be declared to the IRS. If the home is in a particularly desirable location, two weeks of rental income could mean several thousand dollars in income tax-free.

Tax breaks are also available if the house is rented for more than two weeks. As a rental property, the mortgage interest, homeowners insurance, maintenance costs, and utilities are just some of the write-offs that a landlord can use to offset rental income. The biggest write-offs may be 10% to 25% of rental income paid to real estate agents and property managers to find tenants. Some savvy vacation home renters are finding away around those fees, however, by touting a vacation home online at sites like Vacation Rentals by Owner.