In this episode Rachael Van Pelt shares tax strategies that could save you thousands every year if you own a second home or vacation property. Learn how renting out that property for even just a few weekends a year qualifies you as a business owner—unlocking incredible tax deductions like depreciation, mortgage interest, property taxes, and more. You don’t have to be an experienced real-estate investor or full-time landlord to use these tax strategies to boost your retirement savings. This episode provides actionable insights to help you reduce taxes, grow your wealth, and secure long-term financial independence.
In this eye-opening episode of Next Act Ninjas, host Rachael Van Pelt reveals a powerful tax strategy that could save you thousands every year if you own a second home, vacation property, or recently inherited a family home. Learn how renting out your property for even just a few weekends a year can qualify you as a business owner—unlocking incredible tax deductions like depreciation, mortgage interest, property taxes, and more. Rachael compares the tax benefits of real estate income versus 401(k) withdrawals and dives into key concepts like the short-term rental loophole, Qualified Business Income (QBI) Deduction, and the 1031 exchange. You don’t have to be an experienced real-estate investor or full-time landlord to use these tax strategies to boost your retirement savings. This episode provides actionable insights to help you reduce taxes, grow your wealth, and secure long-term financial independence. Tune in now and start turning your second home into a smart, money-saving investment!
Chapters
00:00 Unlocking Tax Benefits for Second Home Owners
01:39 If You Rent Out Your Second Home, You Are a Business Owner
02:31 Your Vacation Rental Tax Write-offs
06:10 The Tax Efficiency of Real Estate vs. 401k
10:58 Think Like a Business Owner with Your Vacation Property
Hey, hey, welcome back to Next Act Ninjas, the number one podcast for mastering your health and wealth longevity. I'm your host, Rachael Van Pelt, and today I'm going to dive into a tax strategy that could put thousands of dollars back in your pocket every single year if you own a second home.
Maybe you have that mountain getaway or condo by the beach, something you sunbird to every so often. Or let's say you inherited a house from your parents and now you're wondering what to do with it. Maybe you even rented it out a few times here and there, but you don't really think of yourself as a landlord. But I have news for you. If you rent out that property even just a few weekends every year, the IRS considers you a business owner. And the moment that happens, you have access to tax breaks that most people don't even realize exist.
But here's the problem. Most people don't take full advantage of these tax benefits. They either don't know about them, they don't track the expenses, or they just assume that all this tax stuff is just for "serious" real estate investors. But the truth is, it's not, it's for you.
But before we get into the details, I want to just preface this episode by saying I'm a realtor and a real estate investor. I'm not a CPA, I'm not a tax attorney, I'm not a financial advisor. So what I cover here today is for educational purposes only. Always be sure to talk to a qualified tax professional to figure out the best strategy for your personal situation. With that said, why don't we dig in?
So the second that you collect rent from a property, even if it's just once a year, you have a business. Now I know a lot of people don't like that word - business. Sounds like more paperwork and let's face it hassles and taxes and honestly a headache. But what if I told you that running this business doesn't have to be hard and that by simply thinking like a business owner you could keep more of that money in your pocket, pay less taxes. Because here's what happens when you don't. The IRS still expects you to report any rental income, but if you're not tracking your expenses, you could end up paying taxes on money you didn't actually make. And that's just leaving money on the table, isn't it? So let's go over the biggest tax perks that come with renting out a second property. I promise you're going to want to hear this.
We're going to start with the biggest tax advantage that most people dismiss, depreciation. Depreciation is a weird concept, so I want to break it down. Even though your property might be going up in value over time, the IRS actually lets you claim that it's losing value every year, on paper at least. Why? Because buildings wear out, they need repairs, they get older. So the IRS lets you write off a portion of the property's value every year as a tax deduction.
What does that mean? Well, let's say you own a rental property worth $300,000. Over the course of 27.5 years, that's the timeline the IRS uses for a residential property, you get to deduct a portion of that value every single year. That could mean $10,000 or more in tax write-offs every year just for owning the property. And the best part, it's a "paper" loss. You're not actually losing money. It's just an IRS-approved way to lower your taxable income.
And let's talk about mortgage and property taxes. If you rent out your second home, even just a part of the year, any interest you pay on mortgage is tax deductible. The same goes for property taxes. That's a big deal, especially if your property is in an area where taxes are high. You're already paying those things. You may as well deduct them.
Now, what about repairs and maintenance? Well, yeah, those are tax deductible too. So if you replace a water heater, it's a tax write-off. New roof? It's a tax write-off. Paint the house? it's tax write-off.
Even travel expenses related to managing your rental property can be deductible. That means if you live in Denver, but you own a rental in Florida and you fly down there to check on it, some of that business trip may be written off as an operational expense.
Now if you have a property that you rent short-term, say on Airbnb or VRBO, there's also something called the "short-term rental loophole". It's a game changer. If you rent your property for 14 days or less each year, you don't have to even report that income. It's completely tax free. Now, if you rent it for more than 14 days, it becomes a full-fledged rental property in the IRS's eyes, which means you qualify for even more tax deductions. Any operational expenses related to your rental are tax deductible. That means things like Airbnb and VRBO platform fees, cleaning fees, landscaping fees, property management fees, all of that's deductible.
And here's where it gets really interesting. There's another tax break called the Qualified Business Income Deduction, QBI. That lets rental property owners write off about 20% of their rental income. That's right, 20%.
So you can see the IRS isn't always out to get us. Sometimes they throw us a bone. That's how the federal government incentivizes property ownership and generally supports housing and economic growth. That is of course until local governments come along and pass dumb rental regulations that stifle economic growth, but that's a topic for another day.
Okay, but now that I've covered those tax benefits, let's talk about how real estate fits into your long-term retirement strategy and why it's often more tax efficient than pulling money from your 401(k). Now, I know, I know you've spent decades contributing to that 401(k). You've built up a nice nest egg and now you're ready to start withdrawing money But here's the part that stings: Every dollar you take out of your 401(k) is taxed as ordinary income (same thing with Social Security). That means, if you're in a high tax bracket, the IRS is taking a third of that money before you even see it. If we run the numbers...
Let's say you're in a 32% tax bracket and you withdraw $50,000 from your 401(k) to cover expenses for the year. How much do you get to keep? Well, at 32% tax rate, you're going to owe $16,000 in taxes. That means out of your $50,000 withdrawal, you're only taking home $34,000. Stings, doesn't it?
Now, if you compare that to income from a property, that generates $50,000 a year in rent. Unlike the 401(k), real estate income is not taxed at the full amount you receive because, as we just covered, you get to subtract expenses first. So after accounting for any mortgage interest, property taxes, insurance, repairs and maintenance fees, operating expenses, depreciation, your taxable income is probably going to be more like half of that $50,000. And if we factor in the QBI, that 20% pass-through deduction, that taxable income gets reduced even further.
So instead of paying taxes on $50,000, you're only paying taxes on, say, $20,000. If we assume that same 32% tax bracket, you're paying $16,000 in taxes from your 401(k) compared to just $6,400 in taxes on your rental income. That's a $9,600 difference in taxes just for using cash flow from a rental property compared to withdrawing from your 401(k).
Now, why does this matter? Well, if you're living off your 401(k), every dollar you withdraw is fully taxed and that shrinks your retirement fund fast. But with a rental property, you not only get to pocket more of that income, the property continues to grow in value over time.
And keep in mind, if you ever decide to sell that rental property and buy somewhere else, you can defer capital gains taxes using what's called the 1031 exchange. I'm going to cover this tax loophole in more detail in another episode, but all that means is if you turn around and buy another rental property within 180 days of selling the first property, you get to avoid paying capital gains taxes. I think it's a great option if you want to, say, trade up that small cabin you inherited from your parents for a bigger vacation rental in a dream location. As long as your initial property was used as a rental and you intend to use the replacement property as a rental, at least part of the year, you're an investor and you get to take advantage of that 1031 exchange.
Suffice it to say with a 401(k), you don't have that option. Every time you take money out of that 401(k), you're paying full taxes on it. Whereas your rental property has those tax advantages. Okay, so what does all this mean? Well, if you own a second home or you're thinking about buying one, you should seriously consider renting it out. Even if it's just part-time, the tax advantages alone will make a huge difference to your retirement savings.
And look, I get it. Not everyone wants to be a full-time landlord. That's totally fine. You don't have to be. There are great property managers out there who are willing to handle the day-to-day for you. And if the idea of a short-term rental sounds more appealing, you have platforms like Airbnb and VRBO making it easier than ever to generate income without long-term tenant commitments.
My husband and I have managed properties remotely for years and we find that it continues to get easier and easier every year. Not just because we're getting more efficient, but because the online tools are getting better and better. And that just means we get to pocket more of our income rather than hand it over to the government.
Bottom line is real estate is one of the most tax-efficient ways to generate income in retirement. If you own a second home, don't just let it sit there. Leverage that asset to work for you. Think like a business owner. Use your property to generate income in a way that keeps more money in your pocket and less in Uncle Sam's. Better yet, real estate income allows you to not just preserve your wealth, but to keep growing it.
Unlike your 401(k) where every dollar you withdraw gets hit with taxes and shrinks your nest egg fast, real estate shelters you from taxes and keeps growing in value. And if you decide to trade up, as I said, a 1031 exchange lets you to defer those capital gains taxes, maybe even indefinitely if you pass that property onto your heirs. That just means you get to keep building a legacy for your family rather than just spending down all of your retirement.
So why don't more people take advantage of this? Well, I think for a lot of people it's because they don't see themselves as real estate investors. They think that's for people who flip houses or own big apartment buildings. But I have to say, if you rent out your vacation home, even just a few times a year, you are in business. And as a business owner, you can take advantage of those tax breaks.
So my challenge to you today is to start thinking like a business owner, not just a homeowner. Stop leaving money on the table. If you have a second home that's just sitting there or you're already renting it but haven't taken full advantage of tax benefits, I think it's time to get intentional about your strategy. Start tracking those expenses. Run the numbers, see if renting makes sense for you. If you're not sure what numbers to run, I'd love to help you get started. You can use the link in the show notes to hop on my calendar anytime and we'll look at your options.
And if you know someone who owns a second home but is not making the most of it, send them this episode. Let's help more people build wealth, pay fewer taxes and set themselves up for long-term financial independence. Until next time, live well, love more, age less my friends.