First Federal Bank Blog

If you own a vacation home or split time between multiple properties, you may be able to earn income by renting to others. But before you decide to pull the trigger on turning your vacation home into a rental property, you’ll want to ask yourself a few questions and be aware of some of the potential challenges.
 
Don’t neglect Uncle Sam
 
One of the first considerations you’ll want to make when considering renting property is the potential tax implications. According to the IRS, you can deduct expenses like interest on your mortgage, real estate taxes, and property insurance on your Form 1040, but only in certain circumstances. Limitations on these deductions will apply if you use the residence for personal purposes for either 14 days or 10% of the days that it’s rented to others at a fair market price, whichever is the greater of the two. If only for this reason, you must acquire the services of a knowledgeable accountant before listing a vacation rental property.
 
Check your local laws
 
It’s just as important to be familiar with your state and municipality’s laws concerning rental properties. According to Teresa Mears of U.S. News & World Report, you may need to register your vacation home or get a business license to list it as a vacation property. Depending on where you live, you may need to pay taxes comparable to what a hotel would pay to operate. Mears also points out some cities and counties may not even allow short-term rentals to begin with, so make sure you read up before taking further steps to list your property.
 
Consider working with professionals
 
Listing a property as a rental can be a daunting and involved process if you’ve never done it before. Mears notes you may want to consider working through a company that specializes in vacation rentals. While you won’t enjoy the same level of profit working with a platform like Airbnb or VRBO as you would working on your own, you’ll also have less obligation in terms of the work that goes into listing a property. These companies can handle everything from booking to communications and offer helpful tools to help you market to potential renters.
 
Insurance is key
 
Your homeowners insurance policy should cover guests like friends and family who stay with you without needing to pay rent or a fee. It does not, however, apply to commercial guests who would pay money to stay at your home, which is why you’ll need short-term rental insurance. According to Bankrate contributor Cate Deventer, you can likely get a policy through your current insurer as part of your existing policy but may need to take out a separate policy altogether. However you go about obtaining it, short-term rental insurance will protect you against excessive use of utilities, liquor liability, and even infestations caused by renters with bedbugs.
 
There are many more steps that go into successfully listing your home as a vacation rental property, so working with an expert or a company in the field is a great way to get started. Be sure to consult a tax professional for your specific tax implications. Once you have all the proper pieces in place, you could be well on your way to earning passive income and putting yourself closer to full financial independence.