Do you have a beach or mountain home that you rent out?
If the average period of rental is less than 30 days, you likely have a choice—either
• claim the income and expenses on Schedule C, or
• claim the income and expenses on Schedule E.
When Is Schedule C a Good Choice?
If you show a tax loss on your rental property, Schedule C is a great choice because it allows you to deduct your rental losses against all other income (assuming you materially participate in the rental property).
If you show taxable income on the rental property, Schedule C is not good because it causes you to pay self-employment taxes.
When Is Schedule E a Good Choice?
If you show taxable income on the transient rental, Schedule E is best because you don’t pay any self-employment taxes on Schedule E income.
If you show a loss on your transient rental and you materially participate, you can deduct your losses against all other income, but those Schedule E losses do not reduce self-employment income.
Okay, now you know how to play the game.
IRS in Summary Mode
In recent advice, the IRS stated that rentals of living quarters are not subject to self-employment tax when no services are rendered for the occupants.
But if services are rendered for the occupants, and the services rendered
1. are not clearly required to maintain the space in a condition for occupancy, and
2. are of such a substantial nature that the compensation for these services can be said to constitute a material portion of the rent,
then the net rental income received is subject to the self-employment tax.
In summary, there’s much to know about rental homes. The rules are complicated and the details of your situation are important. If you would like me to help you make sure you have the rules in hand, feel free to contact me by scheduling a call, or by emailing at firstname.lastname@example.org.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.