Retreating to a warmer climate for the winter sounds like an ideal way to spend a few months. To help make this dream a reality, some individuals choose to rent out their second homes when they are not in use. But before you list your second home for rent, there are a few things you should consider.
Benefits of renting out your property
One reason to rent out your second home is to help cover the expenses of owning it. In addition, you will not have to fully “close it up” when you leave because someone may be staying there soon after. Frequent use of the property may also help deter burglars who might otherwise think the property is abandoned. But, you should hire a property manager to respond to any renters' needs or to check the property on a periodic basis and during periods of vacancy.
Check local zoning ordinances and deed restrictions
Some communities may prohibit renting out a property. If you are purchasing a second home, or have already purchased one, it is important to review your deed and contact the appropriate authorities and/or homeowner's association to make sure that you are allowed to rent your property. If not, you could end up angering your neighbors and becoming involved in a costly lawsuit.
Make sure you are insured
Before you open your second home to renters, check your homeowner's insurance policy to see if it covers rental of the property. You may have to purchase a new policy or add a rider to your existing policy to provide sufficient insurance coverage, but the additional expense will be well worth the investment. The insurance will act as your first line of payment if a renter is injured on your property or the property sustains damage while being rented.
Do Your Homework
You should always obtain a background check on a potential renter and request references, as well. Then, follow up on those references! If you don't, you may end up with property damage or become embroiled in a legal battle if your renters cause issues with neighbors or conduct illegal activities on your property.
Determine liability exposure
Because many different renters may stay at your second home, there is an increased risk of lawsuits arising in connection with this type of use. Transferring ownership to a limited liability company (LLC) can be a worthwhile option for creating greater protection from a potential lawsuit. If a renter gets injured on the property, sues the LLC that owns it, and obtains a judgment that exceeds any property insurance limits you have, the renter can only go after the assets owned by the LLC to satisfy any claims, thereby preventing the renter from accessing your personal assets or those of any other owners of the LLC.
However, in some states, a single-member LLC (an LLC in which you are the only member) does not provide enhanced protection from your personal creditors. The reason is that your creditors should be able to seek relief through your LLC to satisfy their claims because there are no other members that will be negatively impacted by the seizure of money and property owned by the LLC.
Before transferring your second home to an LLC, it is important to speak with the holder of any mortgage on the property. In many cases, the transfer of a mortgaged second home to an LLC can cause the “due-on-sale” clause in the mortgage to be triggered, requiring repayment of the loan in full. Unless you are financially prepared to pay off the mortgage, this may be a substantial and unwelcome financial hardship.
Consider the tax implications of renting out your second home
According to the Internal Revenue Service, if you rent your second home for fifteen days or more a year, the rental income must be reported. In most cases, you will be able to deduct the rental expenses that you have incurred. Because you are using the second home for both rental and personal purposes, you will have to divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Work closely with your tax advisor or preparer to ensure that you accurately report your rental income and expenses and take the appropriate deductions on the right forms. Your tax preparer or advisor can also provide you with tips on proper recordkeeping.
Get your second home ready for occupants
Before your first renter arrives, it is important to go through and remove any personal items that you do not want used, broken, or taken. This may make the space feel a little sterile, but the last thing you want is for a family heirloom to be stolen. You will also want to hire a cleaning crew to come in before and after each group. If you have a long-term renter, you may want to consider adding a provision to the rental contract providing for periodic cleanings of the property (i.e., bi-monthly or monthly) to ensure that the property is well maintained. Not only will regular cleanings keep the furnishings in good condition, but it may also encourage people to rent with you again. If possible, take pictures prior to new renters arriving in case damage occurs. Doing so will provide proof of the property's condition before they arrive to compare with the condition after they leave.
We are here to help
While owning a second home can be expensive, it can offer a lifetime of memories for you and your loved ones. We are here to assist you to make sure your second home is properly included in your estate plan and protected for years to come. Give us a call today so we can discuss ways to maximize and protect your second home. We are available for in-person and virtual meetings.
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