7/10/01 #6/A: D, ND, R, TV
Release: Upon Receipt
Subject: News You Can Use — Rental Income Tax Information
Contact: K. Jerry Smith (jsmith@websterrogers.com) or Donna Winchester (dwinchester@websterrogers.com), 843-665-5900

FLORENCE, SC — Thinking of putting your vacation place up for rent this summer? The Internal Revenue Service has thoughtfully provided a form, known as Schedule E, to account for income and expenses related to rental activities. If this is your first Schedule E (or your 901st), don’t give Uncle Sam an opportunity to raise a shaggy eyebrow. Here are a few guidelines from James A. Free, CPA, a senior manager of business advisory services (BAS) for Webster, Rogers and Co., LLP.

Income
Although it seems elemental, be sure to include all amounts received as rent in your gross rental income. If your rental was handled by a rental/managment company, you should receive a statement that details expenses/fees the company incurred while renting your unit. Don’t be tempted to take a short cut by simply putting their net number (income less expenses) on your schedule. Not only are you circumventing the gross income requirement, you may be shorting yourself a deduction or two.

Do not, however, include a security deposit that is to be returned to the renter (unless the deposit is used in lieu of the final rental payment). Also, be aware that the receipt of property or services in exchange for rent money still qualifies as income. Include their fair market value in your income total.

There is one notable exception to the requirement for reporting rental income. If you rent the dwelling unit that you use as a home for less than 15 days, you are not required to report the income. Some of the lucky folks who live near the Augusta National Golf Club course, for example, take advantage of this exception during the annual Masters Tournament.

Expenses
Utilities, insurance, mortgage interest, and property taxes are all examples of deductible expenses. Although repair costs are deductible, the costs of capital improvements must be recovered through depreciation. Things like paving a drive or adding a deck are examples of capital improvements.You should also depreciate items like large appliances and heating/air units. Use this rule of thumb to tell a repair (expense) from an improvement (capital item); a repair keeps your property in good working order, while an improvement adds to your property’s value. You can also deduct ordinary and necessary travel expenses incurred while maintaining your rental property and/or collecting rent. Another not-so-obvious deduction is the fee you pay to have your Schedule E prepared.
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Personal Time vs. Rental Time
Chances are, you purchased your vacation house because you like its location and intend to vacation there yourself. Be aware, however, that when you (or your family) use your vacation unit for 14 days or more, or more that 10% of the number of rental days, you must allocate your expenses between your personal days and your rental days. This allocation means that only a percentage of your rental expenses are deductible and cannot generate a loss on you Schedule E.

Though your expenses may be limited, don’t forget to move the “unused” portion of property taxes and mortgage interest to Schedule A. You already know that your vacation time at your place counts toward personal days, but there’s more. On the good news side, days that you spend at your place to repair and maintain it do not add to your personal time total.

Now for the bad news — if you donate or “auction” use of your vacation house or condo on behalf of a charity, the IRS considers the time donated to be personal. More bad news — the IRS doesn’t consider this a valid charitable contribution, either.

Although these points cover the basics in vacation rental reporting, each situation is different. Seeking a tax advisor is never a bad idea, especially if you’re preparing a new or different tax form. But whether you elect the do-it-yourself method or enlist the help of a professional, remember this fundamental tax rule: keep excellent records!

Webster, Rogers & Company, LLP is a regional accounting and consulting firm, with offices in Florence, Myrtle Beach, Georgetown, Charleston, and Sumter.