How do you file taxes for RV rentals?
So, you bought an RV or a trailer and put it up on Outdoorsy. You made some money, and now it is time to file your tax return. Maybe you are secretly hoping to write off some stuff too. Let’s take a look at how it is done and what can be deducted. Step one. Figure out what tax schedule you will use to reflect your rental activity. Generally, trailer or RV rental activity should go on the tax Schedule C. Schedule C is used to reflect active involvement in your business. You hustle: answer phone calls and messages, clean your RV, advertise it, and deliver it to your customers. All of it constitutes an active business. And losses from an active business directly offset other income reflected on the first page of Form 1040 (read - immediate tax savings). However, you need to be careful. If you purchased an RV that has a restroom, kitchen, and sleeping quarters, the IRS will consider it a residence. And what happens to rental income from a residence? Most of the time it goes on Schedule E. Schedule E reflects passive income. It means that you are passively collecting your income without many hurdles. Schedule E losses are not always immediately deductible. High-income earners have to defer recognition of loss until they sell their property. For regular people, rental losses are tapped at 25k per year. So, if your RV happened to also be a house, you need to analyze your situation and see if you are actively engaged in your business. Also, there is an IRS rule that says that if your average rental period is seven days or less, the activity is deemed to be active. Taxation of rental RVs with living arrangements is a grey area. The IRS regulations are unclear, and you have to make your decision and stick with it. And, most importantly, keep records supporting your position. Step two. Figure out the tax cost basis of your vehicle. It is very important to calculate the tax cost basis correctly since the biggest business expense depreciation is based on the cost basis of your vehicle. Not to get into details, but generally, the cost basis of a new rental vehicle is price + sales tax + paperwork fees required to process the sale. But what if you bought an RV and used it personally before renting it out on Outdoorsy? In this case, your tax cost basis is the lower of your purchase cost or Fair Market Value at the moment you started advertising on Outdoorsy. You can figure out the Fair Market Value of your vehicle by browsing the internet and finding a similar vehicle for sale with the same mileage and year made. For example, in 2019 you bought your RV for 130K, but when you started to rent, its Fair Market Value went down to 110k. In this case, your cost basis is 110K. What if you bought a used RV? Well, for you personally, this RV is new and your cost basis will be price + sales tax + paperwork fees. Step three. Figure out your business and personal miles. Since you may still use your RV or trailer for personal trips, your personal part of expenses should not be deducted on your tax return. For example, if your business usage of the vehicle was 90%, only 90% of all expenses (including depreciation) will be deductible. Your tax software will figure out the business percentage and amount of expenses allowed for deduction. All you have to do is to enter your business and personal miles. But what if you determine that your RV rental activity goes on Schedule E? In this case, business and personal expenses are divided based on the number of days rented. Schedule E has a bunch of other rules, and I won’t be covering them here. Step four. Figure out what benefits you the most: standard mileage or actual cost tax deduction. Usually, your tax software chooses the most beneficial method, and you don’t think twice about it. However, there are a couple of things that you need to consider. The standard mileage method is an allowance per mile. The IRS gives you 50 something cents per mile, and if you drove 100K of business miles during the year, you get to deduct around 50K on your Schedule C. The standard mileage is beneficial to drivers that drive long distances on cheap cars. The actual expenses method is beneficial to owners of expensive vehicles. An expensive vehicle has a high depreciation expense. Also, expensive vehicles tend to have expensive repairs, insurance, gas, and maintenance. The actual cost method allows the deduction of all of this. However, there is a caveat. If in the first year you pick the actual expenses method, you cannot switch to standard mileage in future years. You are stuck with actual expenses forever. And considering that the tax life of the RV or a Trailer is only five years, after five years, you will be scrambling for tax deductions since your main expense depreciation is gone. If in the first year you pick the standard mileage method, in consequent years you will be able to switch between the actual and standard mileage methods. So, if your rental RV stays with you for eight years, on years six, seven, and eight, you will be able to take the standard mileage deduction. But ONLY if you took the standard mileage deduction in the first year. Who knows what will happen in years 6, 7, or 8, right? Maybe by that time, you will sell your vehicle. Or your RV will have major repairs, and you will be able to deduct all of them on your tax return. The other thing you need to know before choosing between the actual and standard mileage methods is such things as depreciation recapture. It is a difficult concept to explain, and I won’t go into much detail here. Basically, with the actual cost method, you are running a risk of recognizing gain on your tax return due to taking too much depreciation in prior years. This may happen when your current year business use of your rental RV drops below 50% or if you decide to start using your vehicle for personal purposes only. Unfortunately, that won’t happen if you decide to go with standard mileage. Step five. Determine depreciation method (that is if you decided to go with the actual cost method described in step four). This step is emotionally and mentally heavy even for CPAs. To shortly describe the situation, as of 2021, there are four ways you can depreciate your Rental RV or Trailer. Those ways are Bonus depreciation, Section 179, MACRS, and Straight Line depreciation. With bonus depreciation, you can expense your rental RV in the first year and save big on your taxes that year. The question that you have to ask yourself is: what expenses am I going to have next year to offset my rental income? Depreciation will be gone, and I can’t take standard mileage. With Section 179 ,you can also expense the whole RV in one year, but the depreciation expense will only wipe out your income and won’t generate immediate tax loss on your 1040. Instead, the rest of the depreciation expense will be carried over to the next year and will offset your future income on Schedule C. Although, there is one condition for these two methods. Your rental vehicle should be new to you. You could buy it used, but as long as you started to rent it immediately after the purchase, the vehicle is still eligible for bonus or 179 sec depreciation. However, you won’t qualify if you bought your vehicle new, used it for a year, and then put it up on Outdoorsy. In this case, your only option is MACRS and Straight Line depreciation, which are not that bad after all. Straight-line depreciation is self-explanatory. You divide the tax cost basis of your vehicle into five parts and expense each part each year. The MACRS method is more complicated. In general, you get big depreciation expenses in the first two years, and after that, your depreciation expense gradually decreases each year. The other thing I would like to note is that the IRS put a cap on the amount that can be depreciated. Smaller vehicles cannot be depreciated in full. Otherwise, people would be buying Maseratis left and right and taking huge deductions on their tax returns. Most of the heavy vehicles escape the depreciation cap and can qualify for full depreciation. But you have to do your due diligence and read up the IRS regulations. The IRS regulation 463 is a good start. The other thing that you need to keep in mind is that if after three years, you still don’t produce any income on your Schedule C, the IRS may reclass your activity to a hobby, and hobby losses are not deductible. Schedule C is prone to IRS audits, and it is important that you meticulously document all of your activity and expenses. You also need to remember that you will have to report to the IRS for the sale of your vehicle. Your rental vehicle is now a business asset and income and losses from the sale of a business asset should be reflected on your tax return. Can I simply forget schedule C or E and not declare any income? Outdoorsy is very relaxed when it comes to 1099s. You have to have a very high volume before they issue you a 1099 form. But goCamp issues 1099s on any amount. Outdoorsy could later adopt the same strategy and back issue 1099s for previous years. And if this happens, you and the IRS will have a long and unpleasant conversation about your tax evasion strategies.
Congratulations on finishing this lengthy post!!! I hope I didn't bore you. You can now start on your tax return. And if you still have questions, please contact us. We are RV Tax accountants that work remotely and prepare tax returns for the entire US.