Whether it’s going away for the weekends, for a month, or for an entire season, having a second or third home can be a blessing for families that creates lasting memories. It can also come with some significant financial considerations.
Moreover, if you’ve purchased multiple properties for investment purposes, once you get into your retirement years, you’ll want to figure out how to make the most of your portfolio of property investments to generate a steady stream of income.
Here are some key issues to think about:
Plan and Manage
In this case we mean planning about your properties—not your stock investment portfolio. Who is going to be your partner in managing the properties? If your family is not interested in management, is it worth it to hire a property manager? Secondly, do you want to eventually gift your properties to members of your family? Who can walk you through the process and give you solid tax and financial advice?
We hear about many people who spend hundreds of thousands of dollars a month renting luxurious estates and apartments. That’s certainly wonderful if you are the landlord. However, you may not have the experience or time to manage all the business aspects of such a transaction. Consider hiring a knowledgeable financial advisor who can give you the full perspective of owning and managing multiple homes, and refer you to other qualified professionals to make the most of your real estate investments.
Understand Tax Planning
When you own multiple properties, you can deduct the interest on your mortgage just as you can with your primary home mortgage. According to tax law, you can write off 100% of the interest you pay up to $1 million of total debt, which includes the mortgages on homes, as well as money spent on any improvements.
Deduct Your Property Taxes
In addition to mortgage interest, you can also deduct your homes’ property taxes. The good news is that unlike the mortgage interest tax deduction, there’s no dollar limit on the amount of real estate taxes that can be deducted on the homes that you own.
Rent Out Your Homes
For many people who own multiple properties, it makes sense to rent out your empty home when you’re not there. If you rent out your home for 14 days or less during the year, that rental income is tax-free.
However, if you intend on using Airbnb, other rental sites or a real estate broker for more than 14 days after your private rental, it’s important to know that this income is taxable. You'll want to calculate the number of days you rented your home and divide that by the total number of days you or a renter used your home. This is where an advisor like JJ Burns & Company, who’s coordinating with your accountant, can help you make the most of mortgage interest, depreciation, business expenses and other home ownership issues to stay right with the IRS.
Simplify Your Investments
Rather than own residential real estate that may be inconvenient to manage, many people look to invest in commercial buildings. These properties still generate income and may have similar tax advantages, but if professionally managed, do not require the hands-on responsibilities of home or estate ownership.
Depending on your circumstances and the number of properties you have, you may want to consider selling some properties due to taxes, maintenance or the location. You should evaluate which ones generate the most income—especially if you’re retired—and how the sale may impact your taxes.
Something else to think about when selling is how a sale can impact the balance of your portfolio and income-generating investments. At JJ Burns, we can review the full picture of your investment portfolio, pensions, IRA and 401(k)s, rental income, and annuities to give you informed advice about the steps you can take to maximize your current—and future—wealth.
Seek Legal Advice
Retirement planning, real estate, and family law are complex areas that require legal counsel. Unlike working on your homes on the weekends, this is not do-it-yourself territory.
If you decide to keep your properties to generate retirement income—or want to protect your real estate investment portfolio and pass it on to your heirs without going through probate–you can create a Limited Liability Corporation (LLC) or a Family Limited Partnership. Because the laws vary throughout states, counties and cities, it is best to leave the decision to the legal professionals.
We’ve also known about families that have spent fortunes in court, only to be torn apart battling over estates. An LLC gives each family member an equal interest, which avoids future disputes over any properties. There’s also flexibility to transfer shares, consolidate individual properties into a master LLC or into a revocable trust.
Owning a number of homes can definitely enhance your life. And investing in properties is a smart way to bring in income during retirement, as well as diversify your financial portfolio. Whether you intend to manage your properties, sell it, or pass it on to your heirs, JJ Burns can help you collaborate with all aligned professionals to create a tax-efficient plan that works best for you and your family.