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Whether to file your taxes for the vacation rental under schedule C or E has been discussed on the tax board and concluded widely in many places and tax books that it should be filed on schedule E. Recently, on another vacation rental board, I came across this experience"

I don't mean to muddy the waters here, but we just ended an ugly two year 2008 IRS audit and the findings were our taxes were done incorrectly by our CPA. The IRS stated we should be using Schedule C, not Schedule E for the overnight rental cabin.

We have to have 2009 and 2010 revised.

If anything interesting comes up on that thread, I will post it here, as you have to sign up for that Yahoo board. It's well worth watching. Vacation rentals as an industry are exploding in popularity. Perhaps the IRS ignored it for the most part, but now realize they left a good deal of money on the table, if only in social security taxes. I can't help but wonder if this ruling is a sign to come.

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Some random findings for the board.

Schedule C is a form used for reporting income subject to self-employment taxes. Any income earned where self-employment taxes must be paid is included on form Schedule C. Income not subject to self-employment tax is included on a Schedule E form, such as income earned through a business name.

Personal property rental income, like machinery or equipment, is Schedule C. Income on a Schedule C is income earned through operating a business where the owner includes income on their personal tax return. Real estate rental income, not subject to self-employment taxes, goes on Schedule E. This occurs when real-estate income is earned for a business name

But that still leaves it open to the IRS to determine if the income "should" pay employment taxes. And was is "earned for a business name"? If you set up an LLC does that fix the issue?
If you rent buildings, rooms, or apartments, and provide only heat and light, trash collection, etc., you normally report your rental income and expenses in Part I of Schedule E (Form 1040). However, do not use that schedule to report a not-for-profit activity. See Not Rented For Profit under Rental Expenses, earlier.

If you provide significant services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040)

Interesting. So IRS might say that since you clean your rental between each visit, it is for their convenience, so now you are subject to schedule C. I could certainly see a desperate government interpreting it that way to get more money. That's why I would prefer a "flat" tax.
Income and expenses related to real estate rentals are usually reported on Form 1040, Schedule E (PDF). Income and expenses related to personal property rentals are reported on Form 1040, Schedule C (PDF)

Real Estate Rentals vs Personal Property rentals (like a bike or car). Hmmm. Maybe the IRS says vacations rentals are now personal property instead of real estate?
Last year when I reported rental income from my condo Turbo Tax listed it on schedule E. This year it is putting it on Schedule C. ? Isn't Schedule C for businesses?

One Answer
Is the condo a vacation rental where the average stay is 7 days or less? If so I do not believe it qualifies as residential rental and therefore is reported on Schedule C. That would be my best guess.

The 7 days or less might be key.

Another answer
But since the condo is not your primary residence, you are running a business by renting it out. This is actually to your advantage as you can claim the costs of doing business on the Schedule C to offset the income

Of course, these are random sources, but start to provide some insight.
In this thread, they argue that Sched C is better and are trying to be able to use C instead of E...

Client files a joint return. She works, makes a $100,000 + per year, husband on social security and manages their 6 rental units (in 3 houses). With the depreciation deduction they're showing big losses each year ($30,000 to $40,000) but they can't take them as they get phased out due to their income. She's asking, "can't we file the rental income and expenses on Sch. C since it's all my husband does. He works at it well over 750 hours/yr., does all the upkeep, changes the linens, etc."...


I've been doing taxes for many years and have never tried to slide rental income over to Sch C so I'm not real comfortable with it. But then I see on the I.R.S. web site, "Generally, Schedule C is used when you materially participate in your residential rental activity." So I've been looking for something in black and white that says they can't or shouldn't
Rentals where "services" are performed for the "tenants" are considered to be income subject to self-employment tax and properly entered on Schedule C.

IRMN alluded to this. This would be like a boarding house, bed and breakfast, motel, adult group homes, etc.

If the business operation resembled this type of operation, I'd say "go for it"
I have a cient with 5 pieces of residential real estate and he and his wife actively and materially partifipate. They do the repairs, leasing of the property, etc. They both have full time jobs also but the husband is a pilot and is home a good bit during the week and spends a substaniial amount of his time dealing with rental property issues. Can I treat this as Schedule C income/loss and get the benefit of all the losses? Their income exceeds $100,000 and so they are often limited to a small deduction

You are on the right track with stressing the services they do, but they still sound like routine rental property services. Some examples of "rentals" that qualify for schedule C treatrment are"

Bed and breakfasts; motels and hotels; trailer parks with recreational facilities (Note the big difference in the type and volume of services provided to the residents)
The typical rental length is 1 year...the rentals are located in a college town and so most of the rental property is to college students who move in and out in year and who do not take care of the property. My client spends a considerable amount of his time collecting rent and doing the repairs and maintentance to the property himself.
You have just described active particpation. And that type of rental is on Schedule E, not C.
I hate to say this, but your clients do no more that 99% of residential real estate owners the country over. The one-year rentals are typical of Sched E rental properties whereas "rentals" that qualify for Sched C treatment are usually short-term (motels, campgrounds, bed & breakfasts)
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Very nice contribution, PH. As you can see from your research, it is not a simple issue.

We've put putting our vacation home on the VR market on hold, in part because of the never ending delays with the contractors, and in part because of this fuzzy tax issue. The fall back position of it becoming our retirement home is becoming more and more attractive. It doesn't help that in doing much of the work myself I am getting too attached to the place, and would feel a bit as though I were renting out my child.

We bought our place with no experience as a VR landlord, but plenty as a customer. Not being sure that we would like being on the lending side of this industry, we looked at every use of the property to make sure this would be a winning purchase. This was also critical as we saw location after location get fed up with the occasional party house and put in regulations or prohibitions on vacation rentals. Have back up plans prepared and make sure you can afford the property if you do not rent it.

As far as providing other services, perhaps you could set up a second company that deals with that, or find a manager who provides it. That way it becomes an expense that you can break out and have the client pay directly, to avoid the impression that you personally are providing other services. I've seen some VR landlords collect a cleaning fee in a separate check that goes directly to the person doing the cleaning, and some companies that rent out things like bikes, kayaks, and even bbqs and linens. Some VRs make you bring your own linens, and others accept no rental shorter than 7 days.

Like any tax issue there is no doubt a work around if you look hard enough for it. Of course, that work around may need to be tweaked year after year as the IRS changes code. One thing for sure this industry is getting bigger and bigger which means the regulatory target on it's back gets bigger too.

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