Best structure for a remote part-time house hack

[Ron Brady]

My wife and I live overseas ~40 weeks out of the year. We visit our former home area the other 12 weeks (4 visits x 3 wks/visit) to manage/renovate/grow our 7-property investment portfolio and to tend to personal matters. Up to now, we mostly stay in hotels when we visit our former home area.

We are considering purchasing a home with an in-law suite to part-time, remote house hack in our former home area. Doing so, we think, could provide us with a cost-effective and consistent place to stay during our visits stateside. What is the best approach from a tax perspective?

A. Buy as investment property, rent out the main house and use the in-law suite when visiting.

B. Buy as a second/vacation home, rent out the main house and use the in-law suite when visiting.

C. Another option we may be missing.

[Account Closed]

A. Buy as an investment property:

• Pros:
  • Potential tax deductions for rental property expenses, such as mortgage interest, property taxes, maintenance, and depreciation.
  • Income generated from renting out the main house may help offset expenses.
• Cons:
  • You may need to report rental income, and depending on your rental income and expenses, there might be tax implications.
  • Depreciation deductions could impact your future capital gains tax when you sell the property.

B. Buy as a second/vacation home:

• Pros:
  • Mortgage interest may be deductible, up to certain limits.
  • The property could potentially qualify for the mortgage interest deduction as a second home.
  • Easier tax reporting compared to rental property.
• Cons:
  • Limited tax benefits compared to an investment property.
  • You may not be able to deduct operating expenses.

C. Other options to consider:

• Hybrid Use: You might also consider a hybrid use where you allocate a portion of the property for personal use and a portion for rental. The tax treatment would depend on the percentage of time and space used for each purpose.
• 1031 Exchange: If you are considering selling any of your current investment properties to fund this purchase, a 1031 exchange might be a strategy to defer capital gains taxes.
• Tax Credits: Investigate if there are any local or federal tax credits or incentives for certain types of property use, such as energy-efficient improvements.

In any case, documenting your personal use and rental use meticulously is crucial for tax purposes. The IRS has specific rules regarding the number of days a property is rented vs. used for personal purposes, and these rules can impact your ability to deduct certain expenses.