If you’re thinking about investing in a vacation rental property, did you know that you might have some tax breaks available to you? Here are 3 tax breaks you benefit from when buying a vacation rental:
Investment property should provide a benefit to the investor. For most people, they think of the benefit as the cash flow they might get from the income generated, others might think of the income earned if the property will ever be sold. However, there’s a third benefit you might not immediately think of – the 3 tax breaks you benefit from when buying a vacation rental.
We’re covering 3 tax breaks you get when buying and investing in a vacation rental property but be aware that every city and state is different, as is each investor’s circumstance, so what might be true in one situation might not be true in another.
Tax Break #1. Tourism and Municipality Benefit
In your city, there might be a tax break for providing a service to tourists. Most cities love tourism because it brings “outside” money into the city, so you may be qualified to get a tax break on anything from property tax to any the tax paid when you purchase the property. This won’t be the case everywhere but you should always investigate.
And further still, some cities offer tax breaks to people who buy properties with the intention of fixing them up and improving them, since an improvement to one property can generally raise the value of all surrounding properties.
Many cities don’t advertise these tax breaks and it’s up to the buyer to find out if they exist. Spend some time researching the municipal tax breaks in your state, county, city, and neighborhood!
Tax Break #2. Vacation Write-Off
If you own a vacation property then it could mean that part of your vacation expense is a tax write-off! When most people go on vacation they need to pay for food and lodging.
If you go on vacation to your vacation property – you just pay for food and your lodging is already a business asset, so you are getting a huge benefit, including no-cost lodging.
If you combine that travel with some work you do on your vacation property then your accountant may be able to find additional tax write-offs of your time at your property. Again, talk to an accountant about how to do this legally – we are not giving legal or financial advice here!
Tax Break #3. Tax Advantaged Investing
This is our favorite type of tax break – the tax break you get by investing in vacation property inside your IRA or 401k.
When you invest in vacation property inside your IRA or 401k, you are generating income in a tax-advantaged way – either tax-deferred or tax-free, depending on how your retirement account is set up. You won’t be able to use your vacation property yourself in this situation but the tax advantages might make up for that!
You won’t be able to use your vacation property yourself in this situation but the tax advantages might make up for that!
Cash flow, appreciation, AND tax breaks. Those are amazing reasons why you should invest in vacation real estate. And we’ve just covered 3 tax breaks you benefit from when buying a vacation rental; be aware that there could be more where you live!