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 that are not in use. When renting out a property, one must consider legal ramifications, liability exposure, tax implications, insurance policy coverage, and deed restrictions.
Benefits of Renting Out Your Property
Renting out your second home can help cover the expenses of owning that second home. In addition, you will not have to fully close it up when you leave because someone may be staying there. Frequent use of the property may also help deter burglars who might think the property is abandoned. Enlist a property manage to respond to any renters’ needs and check the property 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 or homeowner’s association to make sure that you are allowed to rent out your property. If not, you could end up angering you neighbors and becoming involved in a costly lawsuit.
Make Sure You Are Insured
Before you open your second home to renters, check if your homeowner’s insurance policy covers rental. You may have to purchase a new policy or add a rider to your existing policy to provide sufficient coverage. The insurance acts as your first line of payment if a renter is injured on your property or if the property is damaged by renters.
Many different renters may stay at your property, and thus there is an increased risk of lawsuits. Transferring ownership to a limited liability company (LLC) can provide 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. This would still protect 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 to be triggered, requiring repayment of the loan in full. If you are not financially prepared to pay off the mortgage, this will be a substantial and unwelcome financial hardship.
According to the Internal Revenue Service, if you rent your second home for 15 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 property 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 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 help provide you with tips on property recordkeeping.
Getting Ready for Occupants
Before your first renter arrives, it is important to remove anything 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 or broken. You will want to hire a cleaning crew to come in before and after each group of renters. Not only will this keep the furnishing in good condition, but it may encourage people to rent with you again. If possible, take pictures prior to new renters arriving in case damage occurs. This will provide you with proof of the property’s condition before they arrive compared to after they leave.
We Are Here to Help
While owning a second home can be expensive, it can offer a lifetime of memories. We are here to assist you to make sure your second home is included in your estate plan. Give us a call today so we can discuss ways to maximize and protect your second home.
Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information and to learn about our firm, please contact us.