Tax Planning Should Start Now
+ Renting Out a
Vacation Home? +
Court Denies Tax Deductions
you are expecting to show AGI of $250,000 or more ($200,000 or
more if single) the tax picture for 2013 will include
significant tax changes that went into effect January 1st of
Several new taxes which include:
the additional Medicare tax for employees earning $200,000 or
the additional Medicare tax on net investment income for joint
returns reporting $250,000 (single returns reporting $200,000)
or more in Total Income;
and the increase in capital gains tax from 15 percent to 20
percent for the higher income levels coupled with the
limitation on itemized deductions and personal exemptions will
significantly increase their tax liability.
Tax planning should start now to reduce your overall
Additionally now is the time to review your investments for
tax advantaged opportunities.
Call me at (714) 619-0667 to set up your Tax Planning
appointment for this 2013 tax year (before we hit the 2014 tax
Renting Out a
rules on rental income from second homes can be complicated,
particularly if you rent the home out for several months of
the year, but also use the home yourself.
There is however, one provision that is not complicated.
Homeowners who rent out their property for 14 or fewer days
a year can pocket the rental income, tax-free.
Known as the "Master's exemption", because it is used by
homeowners, near the Augusta National Golf Club in Augusta, GA
who rent out their homes during the Master's Tournament (for
as much as $20,000!). It is also used by homeowners who rent
out their homes for movie productions or those whose
residences are located near Super Bowl sites or national
Tip: If you live close to a vacation destination
such as the beach or mountains, you may be able to make
some extra cash by renting out your home (principal
residence) when you go on vacation--as long as it's two
weeks or less. And, although you can't take depreciation
or deduct for maintenance, you can deduct mortgage
interest and property taxes on Schedule A.
In general, income from rental of a vacation home for 15 days
or longer must be reported on your tax return on Schedule E,
Supplemental Income and Loss.
You should also keep in mind that the definition of a
"vacation home" is not limited to a house.
Apartments, condominiums, mobile homes, and boats are also
considered vacation homes in the eyes of the IRS.
Further, the IRS states that a vacation home is considered a
residence if personal use exceeds 14 days or more than 10% of
the total days it is rented to others (if that figure is
When you use a vacation home as
your residence and also rent it to others, you must divide
the expenses between rental use and personal use, and you
may not deduct the rental portion of the expenses in excess of
the rental income.
Example: Let's say you
own a house in the mountains and rent it out during ski
season, typically between mid-December and mid-April.
You and your family also vacation at the house for one
week in October and two weeks in August. The rest of the
time the house is unused.
The family uses the house for 21 days and it is rented out to
others for 121 days for a total of 142 days of use during the
year. In this scenario 85% of expenses such as mortgage
interest, property taxes, maintenance, utilities, and
depreciation can be written off against the rental income on
As for the remaining 15% of
expenses, only the owner's mortgage interest and property
taxes are deductible on Schedule A.
Questions about vacation home rental income? Give me a
call at 714-619-0667. We'll help you figure it out
Denies Tax Deductions for
Motorhome & Two Business Cars
Dunford claimed $93,565 in deductions for his business
motorhome and two business cars.
He lost all $93,565 in deductions.
What is the one thing that could cost him all his vehicle
deductions? Answer: No mileage log.
When you have no mileage log, the IRS thinks you have no other
records either. That opens you up for a full-blown audit.
In Mr. Dunford's case, he first had the IRS and then the court
preoccupied with his lack of mileage records. There's no
question that cost him a huge chunk of deductions.
His failure to keep a mileage log made the court turn a blind
eye to his vehicle deductions. For example, in court he
submitted receipts in support of his more than $8,000 of
vehicle repair and maintenance expenses. The court said that
it admired the receipts but that it had to ignore those
receipts because Mr. Dunford had no mileage log to prove his
The court did the right thing with its blind eye. It even said
so in its opinion when it noted tax law's Section 274 that
applies strict substantiation requirements to business use of
vehicles and overnight travel. In fact, Section 274 tells to
the court, don't allow deductions without the proof required
by Section 274.
Here's what happened: Mr. Dunford claimed 100 percent business
use of his Ford Explorer and his Saturn SC2. His lack of a
mileage log cost him all the deductions related to those
vehicles, other than those directly reimbursed by his
consulting clients. That's bad, but it gets worse.
Mr. Dunford paid $283,494 for a Beaver Contessa motorhome. He
used it for business and claimed depreciation deductions, but
with no mileage log he lost all his motorhome deductions.
Think about this: He drove the motorhome from Quincy,
Illinois, to his consulting job in San Jose, California, but
he did not log the miles. He had no record of business and
personal nights sleeping in the motorhome.
This lack of records cost him his rightful business deductions
on that $283,494 motorhome.
Section 280A Exception Missed
The court treated the motorhome as a second residence and
allowed only the interest deduction. But if Mr. Dunford had
records and knew the law, he could have deducted depreciation,
repairs and maintenance, gas and oil, and all other motorhome
expenses up to his business-use percentage. In Section
280(f)(4), the law states that nothing in the
disallowance-of-business-use-of-home rules shall disallow a
business travel deduction.
This means that if Mr. Dunford had a record that showed his
percentage of business use of the motorhome, he could have
deducted that business use.
He had two possibilities for a log:
- Mileage log
- Personal and business nights sleeping-in-the-motorhome log
The second possibility arises because the motorhome is both a
“hotel room on wheels” and a passenger vehicle. The question
is how the IRS and/or the courts will treat it. In Dunford,
the court looked only at mileage and, since there was no log,
denied the motorhome business travel deductions.
But in Shirley, the court noted that you could deduct the
motorhome either as a lodging facility or as a vehicle.
In the Dunford case, the question of whether the motorhome was
a lodging facility and/or a vehicle never came up. That's what
a bad mileage log can do. Both the court and the IRS knew that
Mr. Dunford slept in the motorhome for both business and
personal purposes, but that bad mileage log controlled the
conversation to Mr. Dunford's demise.
Records Are the Answer
Mr. Dunford failed to keep tax records. The basic record for
most small businesses starts with the mileage log.
If you want to deduct your vehicles and your motorhome, you
need a good mileage log. It's not hard to keep. It doesn't
take that much time. You just have to do it.
To read this & my other articles online go to
and click on the Newsletter section.
always you can call me at 714-619-0667 if you have any
questions about investing, retirement or any other tax &
accounting related issues.
Regards, Monica Rebella, CPA/IAR
President, Rebella Accountancy