Snowbirds: What You Need to Know about Renting Out Your Property

Retreating to a warmer climate for the winter sounds like an ideal way to spend a few months. To help make this dream a reality, some individuals choose to rent out their second homes when they are not in use. But before you list your second home for rent, there are a few things you should consider.

Benefits of renting out your property

One reason to rent out your second home is to help cover the expenses of owning that second home. In addition, you will not have to fully close it up when you leave because someone may be staying there soon after. Frequent use of the property may also help deter burglars who might otherwise think the property is abandoned. Enlist a property manager to respond to any renters’ needs or check the property during periods of vacancy.

Check local zoning ordinances and deed restrictions

Some communities may prohibit renting out a property. If you are purchasing a second home or have already purchased one, it is important to review your deed and contact the appropriate authorities or homeowner’s association to make sure that you are allowed to rent out your property. If not, you could end up angering your neighbors and becoming involved in a costly lawsuit.

Make sure you are insured

Before you open your second home to renters, check your homeowner’s insurance policy to see if it covers rental of the property. You may have to purchase a new policy or add a rider to your existing policy to provide sufficient insurance coverage, but the additional expense will be well worth the investment. The insurance will act as your first line of payment if a renter is injured on your property or the property sustains damage while being rented

Determine liability exposure

Because many different renters may stay at your second home, there is an increased risk of lawsuits arising in connection with this type of use. Transferring ownership to a limited liability company (LLC) can be a worthwhile option for creating greater protection from a potential lawsuit. If a renter gets injured on the property, sues the LLC that owns it, and obtains a judgment that exceeds any property insurance limits you have, the renter can only go after the assets owned by the LLC to satisfy any claims, not your personal assets or those of any other owners of the LLC.

However, in some states, a single-member LLC (an LLC in which you are the only member) does not provide enhanced protection from your personal creditors. The reason is that your creditors should be able to seek relief through your LLC to satisfy their claims because there are no other members that will be negatively impacted by the seizure of money and property owned by the LLC.

Before transferring your second home to an LLC, it is important to speak with the holder of any mortgage on the property. In many cases, the transfer of a mortgaged second home to an LLC can cause the due-on-sale clause to be triggered, requiring repayment of the loan in full. Unless you are financially prepared to pay off the mortgage, this may be a substantial and unwelcome financial hardship.

Consider the tax implications of renting out your second home

According to the Internal Revenue Service, if you rent your second home for fifteen days or more a year, the rental income must be reported. In most cases, you will be able to deduct the rental expenses that you have incurred. Because you are using the second home for both rental and personal purposes, you will have to divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Work closely with your tax advisor or preparer to ensure that you accurately report your rental income and expenses and take the appropriate deductions on the right forms. Your tax preparer or advisor can also provide you with tips on proper recordkeeping

Get your second home ready for occupants

Before your first renter arrives, it is important to go through and remove anything personal that you do not want used, broken, or taken. This may make the space feel a little sterile, but the last thing you want is for a family heirloom to be stolen. You will also want to hire a cleaning crew to come in before and after each group. Not only will this keep the furnishings in good condition, but it may also encourage people to rent with you again. If possible, take pictures prior to new renters arriving in case damage occurs. Doing so will provide proof of the property’s condition before they arrive to compare with the condition after they leave.

We are here to help

While owning a second home can be expensive, it can offer a lifetime of memories for you and your loved ones. We are here to assist you to make sure your second home is properly included in your estate plan and protected for years to come. Give us a call today so we can discuss ways to maximize and protect your second home. We are available for in-person and virtual meetings.

Considerations Before Heading South for the Winter

For many snowbirds, cooler weather means it is time to head south. If you are thinking about heading for warmer weather this winter, there are a few things you should consider before hitting the road.

What is happening in your destination state?

Because we are still in the midst of a pandemic, it would be prudent to do some research about your winter destination. How many COVID-19 cases has the state had? Are these numbers trending upward? Upon your arrival, will the local or state government require that you quarantine for a period of time? Lastly, are there any additional local orders that you should be aware of, such as a requirement that masks be worn indoors or restrictions on dining in restaurants?

Which state do you consider your home?

Your state of domicile impacts your estate planning, family law matters, and taxes. Due to differences in state tests for determining residency, you can be considered a resident of more than one state; however, you can only be domiciled in one state. Although state laws differ as to determining domiciliary status, the common elements are that your domicile is where you permanently live and where you intend to remain or return. 

Because you are spending time in two (or more) states, you should meet with your tax advisor to confirm that you are filing the appropriate tax returns and have a plan in place to maximize the potential differences in tax laws. For example, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not have any personal income tax. You should also consider meeting with us to discuss the estate planning implications of owning properties in multiple states, especially if you own properties in both community and separate property states

Have you reviewed your estate plan lately?

Before you depart, locate and review your estate planning documents. Life changes are common and sometimes occur without warning. Having an up-to-date estate plan helps ensure that your wishes are carried out during your lifetime and upon your death. The following questions can help determine if your documents still meet your needs.

  • Do you still want your named fiduciaries (i.e., the trustee, personal representative, guardian for a minor child, and agents under a financial power of attorney or medical power of attorney) to act on your behalf, and are they still able to serve in that role?
  • Are your named beneficiaries still alive? Are there any additional individuals or charities you would like to leave something to? Do you want to make any adjustments to the amount of an inheritance or the manner in which you are leaving an inheritance to a beneficiary?
  • Do your beneficiary designations for retirement accounts and life insurance policies match the rest of your estate plan?
  • If you need to move for health reasons but cannot make the decision for yourself, does your agent have the authority to relocate you to another state?

Additionally, you may require assistance with financial matters or transactions while you are away. For this reason, you should review your financial power of attorney to determine if it is springing or immediate. A springing power of attorney allows your agent to act only when you are no longer able to act on your own (as determined by a physician or, in some instances, a judge). By contrast, an immediate power of attorney allows your chosen agent to act on your behalf right away, regardless of your current ability to act for yourself. 

While reviewing your existing estate plan, you should evaluate whether it includes all of the necessary documents. If you currently have a will-based estate plan, it may be time to add a revocable living trust to your estate planning portfolio. This is especially important if you own property in more than one state. Without a trust to consolidate ownership and administration, your loved ones may end up going through multiple probate administrations in different states. This can increase the time and cost of settling your affairs at your death. 

Are your estate planning documents compliant in both states?

Estate planning laws are state specific and for certain documents, such as the financial power of attorney and healthcare directive, each state may have its own statutory forms. While it is possible for one state to honor a document that was validly executed in another state, it will be faster for medical personnel to honor your wishes in an emergency if your instructions are in a familiar form. We suggest that you have an attorney licensed in your second state review your estate planning documents for compliance, and if necessary, prepare a second financial power of attorney and healthcare directive.

As you prepare for your upcoming travel, please do not hesitate to give us a call. We are here to answer any questions and to make sure you are properly protected no matter where you may roam. We are available to meet with you in person or via video conference. 

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