Published: February 07, 2011
Great Tax Deductions for 2nd Homeowners: What Not to Overlook!
The dreaded taxes due date, this year April 18th, is just around the corner. If you own a second home that you rent to vacationers, you're probably not looking forward to scurrying around trying to figure out how much you collected in rentals last year. (The more you made, the more you'll pay to Uncle Sam, right?) But vacation home rental expert Christine Karpinski advises you not to procrastinate much longer. Why? Because the process will yield information you'll need to claim deductions on your state and federal tax returns-so the more thorough your search, the more you'll save.
"The tax rules and deductions for second homeowners who rent out their properties on a short-term basis are complex," says Karpinski, director of Owner Community for HomeAway, Inc. (www.HomeAway.com). "Deductions depend on many factors, including how often you personally use your second home, how many nights or a percentage of the nights you rent out your home, and your personal adjusted gross income (AGI). It's a lot of information, and as with most big undertakings, it's best to dive right in."
Karpinski-the author of How to Rent Vacation Properties by Owner, 2ndEdition: The Complete Guide to Buy, Manage, Furnish, Rent, Maintain and Advertise Your Vacation Rental Investment-says most vacation homeowners are better off using a tax accountant or tax attorney to prepare and file their taxes.
"Unless you have a strong background in accounting, it's too easy to miss something critical," says Karpinski, adding that all the details can be found in the IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes). "But that doesn't mean you can't save yourself lots of money by doing some thorough legwork before heading out to the tax preparer's office."
Whether your vacation rental home was profitable or not, you'll surely have many deductions that can be applied. Karpinski offers the following list of things you should gather and consider when preparing your taxes:
Figure out your gross rental revenue.Your gross rental revenue would be all monies collected from renters (and kept). This includes:
Base rental rate
Cleaning fees
Parking fees
Amenity fees
Pet fees
"To calculate the base rental rate that a guest paid, divide the total that the renter paid by the tax rate in decimal format (the percentage divided by 100) plus one," says Karpinski. "For example, say you billed your renter for $1,672.50 but cannot remember the base rental rate that you charged (pre-tax). If your sales tax rate is 11.5 percent, take the $1,672.50 and divide it by 1.1150 (your sales tax rate converted to a decimal plus one) and you will come up with $1,500, which is the base rental rate."
Know which costs can be deducted or amortized.Deductions can be made in many of the areas associated with renting out your vacation home. Take a look at the deductions checklist below to make sure you don't miss out on any possible deductions. The best way to use the checklist? Gather up the documents you have for all of the information listed below and provide them to your tax professional, who can determine what is deductible in your situation:
Mortgage, Taxes, and Insurance
Property taxes
Property insurance
Hurricane/wind/flood insurance
Liability insurance
Mortgage interest
Private mortgage insurance (PMI)
Refinance and/or closing fees
Homeowner's Association
Dues
Special assessments (may be amortized under capital improvements) -
Travel expenses to attend meetings
Operating Expenses
Utility bills, including power, gas, water/sewer, phone, cable/satellite TV service, Internet service, etc. -
Housekeeping expenses
Expenses incurred to repair damages
Out-of-pocket payments/deductibles for insurance claims -
Maintenance expenses, including pest control, lawn and garden upkeep, preventative maintenance, etc.
Extra compensations to renters, housekeepers, maintenance (including holiday gifts/bonuses)
Linens and linen cleaning services
Supplies, including paper towels, toilet paper, cleaning supplies, etc.
Travel expenses to your vacation home to do maintenance (must be well-documented)
Meals while you are in your vacation home on "maintenance trips"
Property management fees and commissions
Home office expenses, including computer equipment, furnishings, utility bills, etc. based on the percentage of business use vs. personal use (usually a portion based on the percentage of square footage of your home office-for example, if your home is 2,000 square feet and you have a 200-square-foot home office that you use solely for your vacation rental business, then 10 percent of your household expenses may be tax-deductible)
Advertising Expenses
Your ads on HomeAway.com, VRBO.com, CyberRentals.com, or any other website or advertising vehicle, including any special offers, extra photos.
Business cards and other printing costs
Website building and hosting expenses
Photography, virtual tours, copywriting services
Capital Improvements and Amortized Items
Improvements on your home
Furnishings and décor
Depreciation deductions
Tools (hammers, saws, etc.)
Cameras, computers, cell phones, and other equipment necessary to run your vacation rental business
Other Expenses
Checking account and credit card account administrative fees (for business purposes only) -
Postage for mailing contracts, directions, security deposits, etc.
Legal fees
Delivery of your "vacation rental hometown" newspaper
Income tax preparation
Educational expenses-seminar attendance and/or books about renting your vacation home
Two things you should remember about deductions: First, if you're deducting items that you've purchased, they must be used solely for your vacation rental business in order to be considered deductible. For example, you cannot buy a hammer, nail in one nail at your vacation rental, and then take it to your primary home and call it a deduction for your vacation rental home.
Second: Items such as cameras, cell phones, computers, etc. are generally deductible on a percentage-of-usage basis. For instance, if you use your computer only for inquiries and bookings, then you would likely be able to deduct 100 percent of the cost of that computer. However, if the computer is also a "family computer," only a portion of the cost would be deductible.
Understand what the healthcare bill means for your future tax filings. Last year, as part of the Affordable Health Care Act, a tax filing provision was passed that will affect vacation rental owners. The new requirements ask small businesses-under the provision, vacation rental owners fall into the same category-to file a 1099-Misc form for every business-related purchase above $600 that is paid using cash or check. Under the old rules, you had to issue a Form 1099 only for a payment to a consultant or a service provider. Thus, you should have already been filing 1099s for your housekeeper and any other service providers. The new provision requires that the purchase of goods must also be included.
"Here's what it will mean for you come tax time," says Karpinski. "First, the provision applies to payments made after December 31, 2010, so it will affect next year's tax returns. Second, in order to complete the necessary forms, you must obtain every vendor's federal ID and track your purchases. But don't panic! You won't have to start logging every trip to Home Depot. If you pay for a purchase with a credit or debit card, you are not required to issue a 1099.
"Because you are required to issue 1099s only for payments made via check or cash, the new requirements will most likely apply only to transactions with your contractors or maintenance people, as many of them cannot accept payment via credit card," she explains. "The penalty for failing to issue the proper Form 1099 can result in a $50 penalty. The penalty for each intentional failure can be $100 or more. And finally, because the format of the 1099 will change, you may need to purchase an upgraded version of your accounting software."
"No one looks forward to tax season," says Karpinski. "And it becomes even less appealing when you have a mountain of documents to locate for your vacation rental. But when you get your tax return check in the mail-or when you see how much less you have to pay out in taxes based on the deductions you've uncovered-you'll agree that the time and effort are well worth it."
The above is intended as a general guideline and should not be construed as tax advice. Be sure to consult your tax professional.
About Christine Karpinski
Christine Karpinski is the author of How to Rent Vacation Properties by Owner, 2nd Edition: The Complete Guide to Buy, Manage, Furnish, Rent, Maintain and Advertise Your Vacation Rental Investment (Kinney Pollack Press) and Profit from Your Vacation Home Dream: The Complete Guide to a Savvy Financial and Emotional Investment (Kaplan, 2005)
Her books, combined with her seminars, media appearances, and Web site ( www.OwnerCommunity.com , help thousands of people purchase and manage their vacation homes. Today she serves as director of Owner Community for HomeAway, Inc. (www.HomeAway.com).
About HomeAway, Inc.
HomeAway, Inc., based in Austin, Texas, is the worldwide leader in online vacation rentals, representing nearly 540,000 paid vacation rental home listings throughout more than 120 countries. HomeAway offers an extensive selection of vacation homes that provide travelers with memorable experiences and benefits, including more room to relax and added privacy, for less than the cost of traditional hotel accommodations. The company also makes it easy for vacation rental owners and property managers to advertise their properties and manage bookings online.
HomeAway also operates BedandBreakfast.com, the most comprehensive global site for finding bed-and-breakfast properties, providing travelers with another source for unique lodging alternatives to chain hotels.
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