Best tax strategy for buying a ski property late in the year

September 17, 2023 12:53 AM

What's the best number of days to rent and occupy a ski condo if you only will own it for two months?

I know you're not my accountant, but I want help thinking through this. The Augusta Rule (IRS as Section 280A) says that if you rent a property for 14 days or less and stay in it for 14, you don't pay tax on it. Beyond that, there are categorizations based on the ratio of rental / owner days.

If I end up in the lucky position of owning a modest ski condo in the end of October, and I plan to rent it during peak season in December, what is the best strategy?

As far as I understand, these are my options:
1. Stay for 14 days and rent it for 14 or less (not a rental, no taxes)
2. Stay for less than 14 days, rent it for any days (fully a rental - taxed but could write off all expenses, which may be more significant because I'm buying a lot of start up household goods)
3. Stay for 14 and rent for 15+ (taxed, write off a portion of expenses)

Some other factors:
- Staying for 14 days may be tough to fit in, but I will do it if it makes the most sense. (On a full year it would be easy)
- I'm not sure how many days I will get rentals on platforms like Airbnb when listing late, so I'm not guaranteed a certain # days of rentals. (What if I list it mid November and can't even get 14?)
- This is a modest condo - think less than the value of my home

posted by beyond_pink to Work & Money (11 answers total)

I think you should leave it vacant. It’s what’s best for the neighborhood. Also, pay your taxes.
posted by spudsilo at 5:09 AM on September 17, 2023 [3 favorites]

Response by poster: Not to threadsit, but there is no "neighborhood" or permanent residents here. These are basically hotel rooms at the bottom of a ski slope. And in general, I love paying taxes. It just seems stupid to do pay a lot of money for one extra day of rental if my calculations are off.
posted by beyond_pink at 5:15 AM on September 17, 2023 [1 favorite]

I really think this depends on the actual details involved - how much you’ll be renting it for, your marginal tax rate, your deductible expenses, how much of a hassle it would be to spend 14 days there, among other things.

Also make sure you understand what you can and can’t write off - I’m skeptical that you’re allowed to write off furnishings if you intend to use the condo mostly for your own use in the future.

Honestly if it were me I’d do whatever was most convenient for me and then figure out how much tax I owed. Do what you want and keep your receipts.
posted by mskyle at 5:15 AM on September 17, 2023 [1 favorite]

Best answer: It doesn't make sense to think of this in terms of tax threshold days. You need to be taking into consideration how much you can rent it for, and how many days you can rent it, and whether the amount of revenue you can generate falls short of - or exceeds - the potential taxes.
posted by NotMyselfRightNow at 5:38 AM on September 17, 2023 [2 favorites]

Best answer: Try running real numbers on a spreadsheet.

The page you linked to is a SEO-friendly page designed to sell you on the idea that the company that wrote it will help you file all the complicated taxes to maximize your investment property (which they will also help manage -“full service”.) I don’t know much about US tax law, but I do know that selling is the purpose of that page. So personally, I would want to understand what the tax differences are specifically before I invested a lot of time in optimizing my vacation time or limiting rental income.
posted by warriorqueen at 6:09 AM on September 17, 2023 [3 favorites]

There’s more to think about here. For example, a lot of people tend to put rental properties into their own LLC to shield their personal assets from liability. Which seems reasonable for something like a condo that’s mostly used for income in an area and sport where something like a slip and fall injury isn’t uncommon.

It also makes the bookkeeping and tracking more independent. If you’re managing the property you can also pay yourself which becomes an expense and is generally another way to slightly lower your tax exposure. I’d talk to a tax attorney (many are CPAs as well) who does this and get their advice.

An LLC is a pass through entity so the income and income taxes pass through to you and generally isn’t a heavy lift in most states. On the “state” side of things the state and even local municipality is going to make a difference on your tax burden making this harder to answer.

Personally I’d put it in an LLC and treat it like a business (if that’s what it is) generally the tax burden doesn’t change much, but everything else is cleaner when tracking things like expenses.
posted by bitdamaged at 6:38 AM on September 17, 2023 [1 favorite]

Oh yeah, what is your actual long-term plan for this place? How many days do you intend to rent it in 2024, and how many days do you expect to stay? Also do you have expenses that are directly related to the rental (e.g. do you have to pay some kind of fee to the condo association and/or resort for every rental)? You don't want to *lose* money on the rental, obviously, but taxes are only part of that equation.
posted by mskyle at 6:47 AM on September 17, 2023

Going through all the setup and administration to only let a place for 14 days does not seem worth the effort.
Renting it out for 6 or 8 weeks and paying tax may still be marginal when you consider all the costs and potential wear and tear, I'm assuming you plan to sell at the end of the season.
So I would go for option 4. Get a 2 month leave of absence from your job, spend it all at the condo, have the ski holiday of a lifetime and put the place up for sale while you are there.
You only live once, when else will you get this chance?
posted by Lanark at 7:23 AM on September 17, 2023

Response by poster: To clarify, in future years we plan to use it for at least 2 weeks (probably more) and rent it the rest of the time. This is just a question this year because the sale is happening at the end of October. We want to keep it for at least 5-10 years if not more.
posted by beyond_pink at 7:35 AM on September 17, 2023

OK also I think you may be slightly misreading the regulation. I am not an accountant but as I read it there are two elements to it:

1) Is this your "residence" or a dedicated rental property?
and
2) How many days are you renting it for in the year?

As for 1, it's a "residence" if you stay there for EITHER 14+ days OR 10%+ of the days you rent it.

As for 2, if you rent it for less than 15 days, you can avoid paying taxes on the income.

So you also have an option 4) - Rent for up to 14 days, stay for 2+ days (10% of 14 rounded up), pay no taxes on the rental income (but also take no deductions).
posted by mskyle at 8:13 AM on September 17, 2023

In terms of start-up expenses, there is a difference between consumable supplies (used up within 12 months) and tangible property (lasts longer than 12 months). Tangible property below a certain $ value can be deducted in the year you buy it, the rest has to be depreciated over time. So, if the rental is not considered a business in the first two months, you don't get any of deductions plus when you do covert it to a business, you need to value the tangible property at its used good value, not what you paid for it originally. My guess is that if you treat it like a business, you will lose money the first year and can carry that loss forward in case you start making money in the future.

We had a rental property where we never paid any taxes because the depreciation on the house exceeded the rental income. We then had to recapture that depreciation but I think (not sure) that it reduced our cost basis and so got taxed as capital gains rather than regular income. However, ask a real accountant about that part since our CPA's tax software calculated all of that and I just paid what what the form said I owed.
posted by metahawk at 1:40 PM on September 17, 2023 [1 favorite]