So, you bought an RV 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. Since RV taxation is not simple, we have to look at several tax court cases and IRS rules. This blog is just a short overview and does not cover all scenarios. Therefore, it may not be applicable to your situation and it is only meant to be a starting point of your tax research.
Step one. Figure out how to classify your motor home – as a lodging facility or a transportation vehicle. Both the Tax Court and the IRS have had trouble trying to figure out when the motor home is a business vehicle and when it is a business lodging facility. An RV that was put up on rental websites should be classified as a lodging facility (unless you also use it for business transportation, which overcomplicates things and is a subject of a different conversation)
Step two. Figure out how you will be measuring the business use of your motor home. Since your RV's is a rental residence, the business use should be measured in days. In Shirley the court wrestled with this question, trying to decide whether the motor home was primarily for lodging or transportation. The court noted that deciding primary use requires finding a common denominator and then measuring the result. For example:
• When you measure the primary use of a vehicle, you track mileage and tally the results. Thus, with 20,000 miles for business and 5,000 personal miles, you have 80 percent business use.
• When you track the primary use of a lodging facility, you track the number of business nights and personal nights.
• When dealing with a rental RV, you should track business and personal days for expenses and income allocation. We will talk about this later in step four.
Step three. Read up on the transient rule. When the average annual rental period for your RV is less than 30 days, your motor home is treated as a hotel for tax purposes. For example, you rent the motor home during the year for 161 days to 15 different renters. Your average rental period for the year is 10.73 days. You are renting to transients. This makes your motor home a hotel for tax purposes. Personal property in hotels qualifies for Section 179 expensing and the whole business activity is classified as active and goes on Schedule C, where you can deduct your losses immediately.
However, Section 280A(f)(1)(B) states that by using your motor home exclusively as a hotel, you avoid having it deemed a residential rental property under the vacation home rules. One day of personal use can kick you out of the hotel treatment and your motor home will turn into a residential rental under the vacation home rules. Section 179 is not allowed for residential rental property.
Step four. Read up on the vacation home rules. These are important!
You rent your RV for more than 15 days AND you also use your RV personally for greater than 14 days or 10% of days the property was rented to other parties. Your RV is considered a 280A vacation home and your deductions are limited to your rental income. Unused deductions can be carried over to offset future rental income.
In this situation, you will need to learn about the proper order of deducting rental expenses. First, you deduct interest and property taxes. There are two ways how you can allocate these expenses - The IRS way and the Tax Court way. The IRS figures out the percentage by comparing total days rented to the total days used during the year. For example, you use your RV for 30 days and rent it out for 90 days. The IRS allows you to deduct 75% (90/120 total rental and personal days) of RV taxes and interest against your rental income. The Tax Court figures out the percentage by comparing days rented to the total days in the year. For example, you use your RV for 30 days and rent it out for 90 days. The Tax Court says that you can deduct 25% (90/365) against your rental income. It's up to you which method you want to use. The tax court way is usually better for people who itemize since the rest of the tax deduction will be carried over to Schedule A.
The next deduction is direct rental expenses (booking fees, gas, advertising, supplies, cleaning fees between renters). These expenses are 100% deductible.
The next step is to deduct expenses for operating the RV (for example, RV insurance). You have to prorate these expenses the IRS way (see above). Days that the RV was held out for rent, but was not actually rented, are not factored into the calculation.
After that, repairs and maintenance. You allocate general repairs and maintenance similar to the RV insurance. However, if a repair is needed due to the actions of a specific renter then those expenses can be 100% deductible.
And finally, depreciation - the biggest expense! In the case of the vacation home property, you are allowed to deduct depreciation ONLY to the amount of rental income minus the deductions for items above. This means that you probably won't use all of your depreciation. This is not necessarily a bad thing. Depreciation reduces the cost basis of your RV. When it is time to sell your RV, you will have a taxable gain on your vehicle thanks to the depreciation taken in prior years. So, the less depreciation you take now, the fewer taxes you will pay in the future.
You rent your RV for more than 15 days BUT you don't use your RV personally for greater than 14 days or 10% of days the property was rented to other parties. Your RV is considered a regular rental property. In this situation, deductions for expenses aren’t limited by your rental income. But they may be limited due to material participation rules (read below).
You rent your RV for less than 14 days. Your RV is considered a personal-use property. You don't have to report the rental income on your tax return. You can’t deduct expenses either. Consider it a gift.
There was a very important court case, where a couple was disallowed RV tax deductions because of the Section 280A rule. A California couple had an insurance brokerage business, where they were selling recreational vehicle policies. They would drive their RV to various rallies and set up a tent where they advertised their insurance services to potential clients. During their rally years, they generated significant business revenue and felt that they were entitled to write off their RVs as a business expense.
The IRS disallowed their tax deductions, and the couple took the case to the Tax Court where they lost again. The Tax Court studied Code Sec. 280A(a) and ruled that the taxpayers could possibly allocate their expenses based on business/personal days, but the problem was that they could not provide a definite number of business days. In the eyes of the law, even such an innocent activity as watching TV in an RV while being on business will make the whole day personal. No business days mean no business deductions.
The court noted: "The question is then whether petitioners used the RV for personal purposes for more than 14 days. A taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used *** for personal purposes by the taxpayer. Our finding above that petitioners had some personal use of the RV is fatal to their position. Any personal use, including watching TV in the RV, makes the entire day a personal day. Petitioners therefore used the RV as a dwelling unit for personal purposes for more than 14 days, and section 280A prohibits them from taking any deductions with respect to the RV".
This is a very important court case. And the lesson learned here is this: make sure your business and personal days are divided. Read up on what constitutes personal use of the residential property and act accordingly.
Step five. Figure out your depreciation methods. Stay away from bonus depreciation and Section 179 expense just in case. You can apply those methods of depreciation when you consider your motor home a business vehicle or a hotel. But if the IRS determines that your RV is a residential property, you will be disallowed this type of depreciation. Think of depreciation as a form of audit insurance compared to the likely hassles you face with Section 179 and bonus depreciation.
Step six. Figure out what tax schedule you will use to reflect your rental activity. RV rental activity may go either on Schedule C or Schedule E depending on your personal involvement. Tax treatments of these schedules are different, and you need to make sure you completely understand the difference between these two schedules.
Schedule C is used to reflect material involvement in your rental business. You hustle: answer phone calls and messages, clean your RV, advertise it, and deliver your RV to customers. All of it constitutes material participation. And losses from a business with material participation directly offset other income reflected on the first page of Form 1040 (read - immediate tax savings).
Schedule E is used to reflect passive involvement in your rental business. The recreational vehicle by default is considered a dwelling unit and you need to prove to the IRS your material involvement if you want to reflect your rental activity to Schedule C. With Schedule E activity all you do is passively collect your rental income. For example, you may have a management company do all the work. Passive 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.
There is also one interesting IRS Rule. If your average rental period is seven days or less, then your activity is not considered a rental activity. This means your activity is not passive and you can deduct your tax losses in the same year you incurred them without any limitations. However, you still need to prove that you materially participate in the activity. There are no immediate tax deductions without material participation.
If you can prove that you materially participated in renting your RV and your rental activity meets the seven days rule, you should put your activity on Schedule C. If you determine, that your RV rental activity is passive in nature, it should go on Schedule E.
Step seven. Figure out the tax cost basis of your vehicle. It is very important to calculate the tax cost basis correctly since depreciation is based on the cost basis of your vehicle. The cost basis will affect your current and future tax returns. 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 motor home 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.
After you figure out your cost basis, you need to take depreciation only for the business use of your vehicle. As I mentioned before, you can allocate the depreciation expense based on business vs personal days.
I am sure that by now you are pretty confused and wonder if you want to mess with the whole write-off thing. Can I simply forget schedule C or E and not declare any income? I am saddened to tell you that you should not do that. Outdoorsy is very relaxed when it comes to 1099s. You have to have a very high volume before they send a 1099 form to the IRS. 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. To summarize this lengthy post: Your rental RV is a dwelling unit with a useful life of a vehicle. You will have a hard time deducting expenses if you can't prove a solid record of rental days. Also, don't claim Section 179 and bonus depreciation on your motor home. Instead, stay with MACRS depreciation to avoid extra IRS audit attention.
If you still have questions, please contact us. We are RV Tax accountants that work remotely and prepare tax returns for the entire US.