The IRS basically uses a two-week de minimus rule. If you rent out a vacation home for two weeks or less during the year, you don't have to report any rental income you receive, but you can't deduct any rental expenses you have (except for the normal home mortgage interest and real estate tax deductions you'd have anyway). Essentially the IRS will ignore this small amount of rental activity.

If you have property that is rented out for more than 14 days during the year, and you or your family, or any co-owner or his or her family, use it for personal purposes for even one day of the year, you have to divide all the expenses of the property into two buckets: "personal" and "rental."

The rental expenses will generally be deductible on Schedule E, Supplemental Income and Loss, and the personal expenses will not be deductible except for mortgage interest, real estate taxes, and casualty losses that you could ordinarily claim on Schedule A.

On Schedule E you can deduct the entire amount of expenses that apply only to renting, such as advertising, commissions, credit checks, etc. For all expenses that apply to the entire home, such as mortgage interest, real estate taxes, insurance, utilities, and repairs and maintenance on the furnace, roof, electric system, etc., you must generally divide the expenses on the basis of days spent for personal use, compared to days that the property was rented at a fair market rate; the total need not add up to 365 days.

When counting days of "personal use," you must include any days that you donated the use of your property to a charitable organization (for example, if you allowed a charity to auction off a week in your lakefront house). Also count as "personal" any days that you traded with someone else for the use of a different property, or any days for which you charged less than fair market rent. However, don't count as "personal" the days you stayed in the home because you were having repairs or maintenance done, even if your family stayed with you.

Dwelling unit used as a home. An even more severe restriction applies if you (or your family, or any co-owners or their families) use the property for personal purposes for more than the greater of 14 days, or 10 percent of the days it is rented out to others.

In that case, not only do you have to apportion your expenses between the "rental" and the "personal" portion, but also if your rental expenses exceed your rental income for this mixed-use property, you can only deduct your expenses up to the amount of your income. Any remaining expenses can be carried over and deducted in the next year, however.

As far as tax planning goes, knowing where you've been can help get you to where you want to go, especially if you're self-employed. In other words, seeing how you came out on your last tax return can help alert you to changes that need to be made to minimize your tax burden next time.

You don't have to apply this additional limit if you converted rental property to a personal residence during the year. You also don't have to apply it if you converted a personal residence to a rental during the year and you rented or tried to rent it out for at least 12 months, or if you would have rented it for at least 12 months except that you sold or exchanged the property before the 12 months were up.

For a more general overview of this area, please consult Real Estate.

Tax Guide 2008

Penalties for Underpayment or Late Returns
What happens if you don't file a tax return or pay taxes that you owe by their due date? Generally, in this situation the IRS will send you a notice hitting you with interest and penalties.   For more details, please review Penalties for Underpayment or Late Returns.

What To Expect if You Are Audited
Hopefully, this will not be an issue for you, but you should have some awareness of the IRS audit procedures. The IRS has several different levels of audits. If questions arise about your math, items seem to be omitted from your return, or your figures don't match those on your W-2s, 1099s, or 1098s, the IRS may simply request a correction or explanation by mail.   To explore this topic further, take a look at  What To Expect if You Are Audited.

Keeping Good Records
Preparing to meet your annual tax obligations is a year-round process. For example, everyone who pays taxes is required to keep accurate, permanent books and records so they can determine the various types of income, expenses, gains, losses, and other items that affect their income tax liability for the year.   To help get you on the road to better tax organization, please read Keeping Good Records.

Tax News

New Tax Laws Enacted

After months of political wrangling, Congress has passed a small business tax incentives bill coupled with an increase in the federal minimum wage. The Small Business and Work Opportunity Tax Act of 2007 (2007 Small Business Tax Act), signed into law on May 25, 2007, is part of a much larger and more controversial bill, H.R. 2206, U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007. The 2007 Small Business Tax Act targets nearly $5 billion in tax incentives, principally to small businesses. It also includes tax incentives to help taxpayers recovering from Hurricane Katrina, as well as an important package of S corporation reforms. However, revenue raising provisions totaling nearly $5 billion mean more taxes for certain taxpayers, especially familes with children.   To learn more about this recent development, please read New Tax Laws Provide More Pain than Pleasure.

Post-filing Retirement Planning

For many taxpayers, the 2006 tax season was extended beyond the April 17 filing deadline for a variety of reasons. If you're a calendar year taxpayer that filed IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, for an automatic six-month filing extension, you have until October 15, 2007, to file your required tax forms. While many of the planning opportunities for tax savings for 2006 ended as of the April 17 filing deadline, if you are self-employed and have a Keogh retirement plan in place, you still may be able to take advantage of deductions for contributions to a retirement plan for the 2006 tax year.   To learn more details, please read Tax Extensions Still Allow for Retirement Planning Opportunities.

Planning for Next Tax Season

Mercifully (or unmercifully), this year's April 17 tax deadline has come and gone. Unfortunately, the same cannot be said for our continuing obligations as taxpayers. With another tax filing season less than a year away and while your psychological scars are still fresh, please consider these lingering tax-related issues.   For more on this story, please look at Prepare Now for Next Year's Tax Season.

Social Insecurity

Social Security’s long-term financial outlook improved slightly, according to the latest report from the Social Security and Medicare Board of Trustees. But the outlook is hardly cheery, and the report prompted calls from politicians to reform the system.   To learn more about this problem, please read Social Security Still Going for Broke.

Small Business Tax Gap

Democrats and Republicans on the House Small Business Committee told IRS Commissioner Mark W. Everson on April 26, 2007, not to overburden small businesses to try to close the $300 billion tax gap--the difference between what taxpayers owe and what they pay.   To learn more about this issue, please read Are Small Businesses a 'Tax Gap' Target?


Tax News Archive

For more news stories and features on federal, state and payroll tax issues and how they may affect you, read the listing of articles in the archive.

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