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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Thinking about Renting Out Your Vacation Home? Consider this!

Updated: Dec 18, 2021

Bridget got a question this week--what are the pros and cons of renting out your vacation home? John is a CFP® who owns a vacation home. He shares his experience on the pros and cons in this episode.

We talk through if the tax benefits are what you might think (probably not) but what the benefits might be. Do you feel gratified because you may be helping other people create memories? Or are you going to get so annoyed that you leave a nastygram to all future renters when someone breaks a chair?

While the benefits include getting some some cash from renting, it comes along with the proverbial late night plumbing calls, as well as increased regulation and requirements from the local municipality. In popular vacation areas, those regulations and requirements seem to be increasing.

Yet he feels great that the property he loves is being used and enjoyed by people.

Bridget speaks as a CPA saying that if vacation homes are helping you on your taxes, it generally means you're spending a lot of money on your vacation home. That doesn't mean don't do it, but both John and Bridget don't see vacation homes as a great tax strategy.


John: Lots of people rent out their vacation home. Should you? That's what we're going to be talking about on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. And I've got a fee-only financial planning practice in Chicago, Illinois. John, I just got this question this week, and I thought it would be a great one to talk about on the show, because I know you have a vacation home and you're a financial planner. So, the question that came to me is I've got a property that…is a vacation home. It's my dream. I've always wanted to do this. I plan on passing it down to my heirs. Should I rent it out? And so I thought we could…it’s great topic for you. So, what are your thoughts?

John: Well, I appreciate that you think because I own a vacation home and I'm a financial planner that I make good decisions. Right? That's a big assumption on those things, but I appreciate the confidence you have, Bridget. So, it's an interesting point. So, we do…we got a place on a lake up in northern Wisconsin, and we do rent it out. We've got some renters there this week. And so a lot of how I look at that is that it can be a nice way to bring in some money, right?

So, we pay our taxes with that money and can do some improvements. But oftentimes people think that it's a great tax shelter. Maybe there's some real benefits, and there can be some tax benefits, but it doesn't work out the way people think from a tax standpoint as much. And so it's not like, “Oh, boy, yeah, you're going to save all kinds of money from a tax standpoint.” Ah, maybe you get some tax benefit, but that's like the frosting on the cake or the sprinkles even, on top of the frosting. It's like, if you're doing it, if cash flow is important for you to try to make some money and support your vacation property, it can make sense.

But the flip side, (and we've talked before about renting property in general and being a landlord) the flip side is that...and as I heard you describe your client: “Hey, this is our place that we want to pass down for generations," and somebody else is living in your house.”

Bridget: Right.

John: Just this week we had an issue with our plumbing, the proverbial plumbing issue. So we're dealing with it from a couple of hours away. And the person I got that we got somebody who's really good, and he got there. Well, here's the problem. I said, “Well, super, how do we fix?” And he goes, “I have no idea who can handle this for you.” Now what do we do right like that?

Bridget: There's nobody in the entire County or couple county area. Yeah.

John: he's been in the business, and he works for the sewer district now. He's been around for 25 years and he said, I don't know, you just have to start making phone calls. Okay. That's a real fun use of our time

Bridget: From hours away.

John: So even when we've got somebody…here's a smart person, who thankfully is helping and giving us advice on what's wrong…we got to deal with that issue, right? So those are the things. And then things get broken, right? Chairs get broken. And it's not even people that take care of things, right? It's just not theirs. It can be just different.

Bridget: Yeah.

John: Well, those are the things that people…It sounds great when those checks come in, right? It's really nice. But, what's the flip side, and what's important to you? So those are some of the considerations that I have people think through before they decide to rent out their place.

Bridget: What you’re saying, it's seems like what you're saying, is that there's some emotional drawbacks, not just that you have to do work, but it's also that somebody's in your place. And how do you feel about that?

For some people it might be good, because they might be thinking, “Oh, well, then it's being used, and I like to have my place being used instead of just sitting there.” But then other people might feel more proprietary about it and feel like, “No, this is my dream. I want this to be mine.” So, is that the dichotomy that you see?

John: Yeah. I mean, you described it really well. That's exactly right on. Just as a personal example. For us, this is a place, a lake, we have gone to for many years. We had rented this place for several years before the owners put it up for sale. So, our history, my personal history and my family’s, is going and renting a place at the lake for a week.

That was what our vacation was, one of our big vacations. And so when we bought the place, but still…we have renters that have come up year after year, and they bring their families. And one of our values as owners is being able to share. It's a really neat place, and if we're not going to be up there…our goal is not to go up every weekend.

So, if it's not being used, to share this resource and have other people have their family memories of year after you're going to this cottage, there's value in that for us personally, that makes us feel good, that we're able to share that with other people. And of course, they're paying us for it, it's not out of the goodness of our hearts.

If we're making some money and we're having this other part that's a really big component for our family, then it fits. And for other people, as you describe, “Hey, wait a minute. I don't want people in my house and doing things.” And so you have to look at it from that side of things. And one thing just popped into my head, one of the things that we have to deal with is being zoned in our County, effectively, as a hotel. That's not the right term, but as a place for…

Bridget: Right. Good point!

John: vacation residents. And so the County comes in and has to inspect our property every year, and we have to meet certain requirements. And it's not a big deal, but it's just those little things, right? That sort of thing where we have to pay taxes to the County when we have renters that come in, just like a hotel has to pay taxes.

Those sorts of things are not a big deal, but we've got to send in a quarterly report, and that's just enough of a pain in the rear end. It's…it adds layers of complexity that we otherwise wouldn't have.

Bridget: Right. And I know that in some resort areas, there restricting or there's more laws about what you can really do. So, I don't think that people can just assume they can rent it out or that they can rent out to make X amount. It depends on where the property is, and probably the hotter the location, the more kind of red tape or other people that want to have their opinion heard about how you use it. Yeah.

John: So, to me it's a personal decision, and you have to look at the revenue. You could make some money, right? But, how much is that versus the other side of what you lose, right, on the downside? It's sort of like the idea (and we've talked before about): Do you even when you buy a vacation place? We often spend money on things, or it's not an investment, right? ​

Bridget: Right.

John: You take a trip, you know? So, if you separate out that. Oh, yeah, you can make money doing a lot of things, but how does that relate to your other goals? What are your goals for this? What's important to you? What's useful? And have that drive your decisions and not just the dollars. Right?

Bridget: Right

John: I think that's the thing that people can fall into the trap of. Oh, I get those dollar symbols in my eyes or the tax things that I don't really.

Bridget: Yeah, don't do it for taxes.

John: If people can think about it from where their goals are: What do you want to have happen?

Bridget: Right.

John: And how does that work?

Bridget: Right.

John: And maybe bringing in that extra revenue may help you reach your goals of remodeling or doing other things? Great! But figure out so much what we talk about with people. It's about the plan and about what you want to have happen. And then the numbers come after that.

Bridget: Right. I really appreciate how we've gone back to, like, what's your dream? And let's define that dream more…Let's define that more and then operate from that and let the money follow that.

John: Yeah. No, that's exactly it. So as a way of maybe summarizing, I kind of go back and forth on these things. It can pay some bills, right? So, the financial side of it is there, but don't count on tax savings, because that’s…

Bridget: Neutral. It might help you; it might not. I've seen some people it helps, but it’s usually because their…spending a lot of money.

John: Anything can be a tax right off if you lose enough, right?

Bridget: Right.

John: But it's the biggest thing that you put your goals first. Figure out what you want, right? Then work those things behind. So those are kind of the three things maybe for takeaways I'd have from this discussion.

Bridget: Awesome. So to wrap this up, I'm Bridget Sullivan Mermel, and I've got a practice in Chicago, and this is John Scherer, and he's got a practice in Middleton, Wisconsin. We’re both members of ACP, or the Alliance of Comprehensive Planners, which is a group of planners that has values that are common to us and is a non-for-profit group. And if you like the way that we think through things, check out AC Planners…if you're interested in finding a planner in your area. And generally John talks about subscribing.

John: Yeah, that's right. The other action item is to make sure you subscribe to our channel here. That helps other people find this sort of information. So, if you find this valuable, please hit the “Subscribe” button. And with that, until next time, Bridget.

Bridget: Thanks, John.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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