Jun 22

Vacation Rentals (June-2022)

This month I’m going to explore vacation home rentals.  Vacation rentals have different rules for short-term or long-term and whether or not other services are included in the rental of the property.  First, you need to consider whether you use it as a dwelling unit or not.  Did you use the dwelling residence for personal purposes, during the tax year, for a number of days, that’s more than the greater of 14 days or 10% of the total days and you rented it to others at a fair rental price?  With this in mind, we need to understand the definition of personal use of the dwelling.  It is any day you use it, or any other person uses it, and who has an interest in it, a member of your family or of a family of any other person who has an interest in it, and anytime the unit is used at a less than fair rental price, whether they are related or not.  So, let’s take a look at the 14-day basic rental rules.  If you receive rental income and the usage is less than or equal to 14 days, you don’t have pay income tax on the income and you are not permitted to write off any relevant expenses when it’s your personal residence.  However, if the personal usage is more than 14 days, then all or some of the expenses may be deducted, based on the amount of usage and further review of the rules is required.  If you receive rental income and it’s not your personal residence, all income is reported and all the expenses are deducted against the income.  What if you have someone living in your house and they are giving you money towards the utilities, cable, etc.  The question is it really rental or not?  It is rental income, if you have a rental contract, detailing the monthly payment, and you’ll then follow the rules previously discussed.  If there isn’t a rental contract and they are just paying their share of the expenses, I don’t see it as rental income.  But, remember, if there isn’t a contract, this will considered their living abode and eviction may be a real legal issue, if it becomes necessary.  So, be careful when you decide to do this.  Next, I want to discuss whether you have an independent contractor or an employee and you run a business.  This subject is always being revaluated and there isn’t a black and white answer.  The present, generally accepted decision making categories are:  Behavior Control, Financial Control, and Relationship to the Parties.  Behavior Control, in short, does the company control or have the right to control what the worker does and how it’s done.  Financial Control, in short, does the business direct or control the financial and business aspects of the worker’s job.  Things like, how the worker is paid, expenses are reimbursed, and/or who provides the tools, supplies, and materials.  And, Relationship, in short, is there a written contract between the company and the worker providing the need, is the worker required to be present any defined period of time, are they evaluated on production, are they paid by the hour, etc.  All three of these, working together, determine if the individual is an employee or not.  Misclassifying workers as independent contractors may subject the company to be liable for employment taxes for that worker (plus a 100% penalty), both at the Federal and State level, disallowed deductions for the payments to the employee, failure to file W-2’s penalties, and audit.  It’s not worth it.  Play the game right and you’ll be way ahead in the long run.  On another note, any worker who believes they have been improperly classified can file the Form 8919, Uncollected Social Security and Medicare Tax on Wages, to properly pay their taxes.  This is a brief overview.  Additional details and specific assistance in applying the general information in this article may be attained by contacting your tax advisor or our office.   Provided by Tracey C. Higginbotham, E.A., (321) 632-5726, a member of the National Society of Accountants.