Three Ways to Own a Condominium
Thinking about buying a Lake of the Ozarks condominium as a rental property? I have owned many condominiums as rentals myself and have knowledge of the pros and cons of "rental property" ownership at the Lake of the Ozarks. There are basically 3 ways to "own" a Lake Condo, at least as far as our friends at the IRS are concerned.
- You own it as a second home.
- You own it as a vacation rental.
- You own it as a business.
These are important distinctions when it is time to sell your condo, and your CPA will want to know every year on April 15th. A second home is just that, and you should be able to write off your interest paid on the loan and your real estate taxes. Assessments, utilities, repairs cannot be expensed at tax time. You should, however keep a record off all money spent on the unit for expenses and repairs, this will come in handy when you sell the condo.
If it is a vacation rental, I have a great article that explains what that means at tax time.
If you own the Condo as a business, you might want to explore putting the property into an LLC and making sure it is properly insured. You must not use the property for personal days, at least no more than 14 days. Taxes, assessments, utitlies, repairs, travel to the property for repairs, etc, all should be considered an expense. By owning your condo as a business, any loss you incur at the sale of the condo can be expensed.
A tax loss occurs when you sell your condo for less than its tax basis. Note tax basis, not sale price. Calculate your tax basis starting with the price you originally paid, plus the cost of improvements over the years. You will need to subtract the cost recovery or depreciation you took on the condo. One interesting note is that if you paid any special assessments along the way, while you couldn’t write them off as expenses in the year they were incurred, you can use them to increase your basis to offset capital gains. Save that paperwork!
If you have a tax loss on a property you've owned for over a year, then you have a Section 1231 loss. This is the best kind of loss you can have because you can deduct it against all types of Income.
If you are selling and looking at buying another property, a 1031 exchange MIGHT be a good option. Talk to a tax professional.