Tips on Turning Your Vacation Home to a Rental

With the high cost of fuel combined with the tax benefits of owning investment property, it could be a good time to capitalize on the rental market with your vacation home. Depending on your reasons for investment property, it is important to understand some IRS rules before going forward. The main one is the "Passive Loss" rule.

Many people buy investment property for two reasons - income revenue and tax breaks. Typically vacation properties are not near your home and could require someone to manage your property. If this is the case, then you might consider these tips.

Decide Whether You Will Be an Active or Passive Investor

Now, those of you who need to hire a rental management company to manage your rental home might want to think about the definition of what IRS considers active and passive activity participation as an investor. As stated above, one reason people have rental property is to be able to write off expenses along with depreciation.

When hiring a rental management company, in their contract with you, you should request that you make the major decisions on the home from choosing the tenant to deciding major repairs. The reason is because of what constitutes active and passive involvement with your rental home. If the taxpayer makes the major management decisions, he generally can deduct up to $25,000 in losses against non-passive income, subject to the $150,000 adjusted gross income limitation. This is only if you can prove you are an active investor in your rental home. If you do not make the major decisions you might be considered a passive investor. Your loss is limited to your income that you receive on your rental property. Please consult with your tax accountant or attorney for verification.

Now a rental management company's written contract might say they make the major decisions. If taking losses on your investment is important to you, remember everything is negotiable. If your rental management company won't re-word the contract so that you make the major decisions, then find one that will. I'm sure there is a hungry rental management company out there that will.