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A huge attraction for many Big Sky buyers, apart from the "fun factor" of your own place in the mountains, is earning money by having that condo managed for overnight rentals. Plus, there is the prospect of eventually selling it at a profit. Too often buyers take a quick look at the basic costs of buying: association fees, mortgage payments, and management fees of up to 50%. They are disappointed. Many folks expect that the condo should pay for itself and they look at a single year with a "cash box" outlook. They weigh the cash-in versus the cash-out and it looks like a losing proposition. Tax regulations on vacation homes can be tricky when it comes to renting them out, personally enjoying them, and selling them. The tax outlook varies depending on your income, how much you use the condo personally, and how much you rent it out. If you own a Big Sky condo and don't rent it out, as far as the IRS is concerned your ski-getaway-condo is just like any other home. This means you can take deductions for mortgage interest and real estate taxes. Besides that "fun factor", you can get a nice break if you rent the place out for 14 days or less since that income is tax-exempt and you don't even need to report it to Uncle Sam. But you want more than that, so lets look at making that condo a solid rental property. First, if you limit your personal use, you'll get a bigger tax break. Next, keeping good records is critical. The tax advantage of renting lies in your ability to take advantage of potentially large deductions such as commissions, repairs, and especially depreciation. Realizing tax losses from renting out your condo are restricted by your income. When you sell your condo you'll need to figure any capital gain and pay tax on it. And you'll need to factor in the advantage of the depreciation that you've been keeping track of for each year you've owned and rented out your condo. Say you are like many Americans and you are disappointed in those quarterly stock market statements. Ask your accountant to do a 5-year projection and compare the performance of your condo against the performance of one of your mutual funds or stocks. You'll need to know the condo expenses and you will need to use a reasonable estimate of annual appreciation for the condo. Your real estate agent can help you with these numbers. Chances are excellent that your accountant's analysis will show that the condominium performs well compared to the stock market. And this is without that "fun factor" as part of the equation. Would you rather ski Big Sky or open those quarterly statement envelopes? November 2004 By Ron Tabaczka This is not intended as investment advice. Please talk to your accountant. |