Tax Free Income From Renting Your Home

From Canton, Ohio, where the Pro Football Hall of Fame Weekend takes place in August, to Los Angeles, which has Haunted Hayrides to celebrate Halloween throughout October, cities small and large host special events throughout the year. 

Moreover, oceanfront communities attract millions of tourists in the summer while mountain regions offer winter sports each winter.

            

What is the common denominator? If you live in an area popular with tourists, for a season or a month or even a day, you can rent your home for a sizable amount. According to some reports, homes in the Augusta, Georgia area rent for as much as $20,000 for the week of the Masters Golf Tournament in April.

Income from such rental activity is legitimately tax-free: you don’t have to report it on your tax return. You can’t deduct any expenses incurred for the rental, but you still can take applicable mortgage interest and property tax deductions for your home with no reduction for the profitable rental period.

Fortune’s fortnight

As you might expect, you have to clear some hurdles to qualify for this tax-free income. Perhaps most important, you must rent the home for no more than 14 days during the year. If you go over by even one day, tax-free taxation will vanish. In that case, you will have to report your rental income, and you may take appropriate deductions, but the process can become very complicated.

In addition to the 14-day limit, the IRS says that you must use the “dwelling unit as a home.” This means that you must use the property for personal purposes more than (a) 14 days or (b) 10% of the days it is rented to others at a fair price, whichever is greater.

Example 1: Jan Harrison lives in Charlotte, North Carolina, throughout the year but rents her home for a week when the Bank of America 500 race is in town. She moves in with her sister and then goes home after the weeklong rental ends. Jan lives in her home well over 300 days in the year, so claiming the tax-free rental income won’t be a problem.

You also can claim this tax break for a vacation home as long as there are at least 15 days of personal use and you keep rentals under 15 days a year. With either a primary residence or a second home, keep careful records to show that you observed the 14-day rental limit.

Proceed prudently

Tax-free income is certainly welcome, but it shouldn’t be your only concern. Keep in mind that you are letting other people occupy your home, perhaps during a time when parties may occur. Make sure you have a formal rental agreement in place and that you collect the rent upfront, along with a deposit for possible property damage. Check with your homeowners insurance agent to see if you need special coverage, and check with local officials to find out if you need a permit for a short-term rental.

            If you decide to use a service to handle the rental and save you some aggravation, ask what fees you’ll owe. In addition, ask if the rental income will be reported to the IRS. Such reports may complicate what can be a straightforward tax benefit; our office can explain the possible problems and solutions.

SC Rental Home?  Check this out.

Prime Points for Your Buy-Sell

Businesses with more than one substantial co-owner should have a buy-sell agreement. This agreement can help all parties when the inevitable happens, and one of the owners no longer can or will participate in the company as they had been. For the best result, your buy-sell should include a plan for what will happen when the following so-called “trigger events” occur.

Owner’s death

Assume a company is owned equally by Lynn Jones and Greg Harris. They both work full time, contributing to the company’s growth, until Greg dies unexpectedly.
A buy-sell can set the stage for Lynn to buy the company shares that Greg’s wife will inherit. A predetermined formula can set the buyout price, which Lynn will pay, and some life insurance can provide the funds she’ll need. Alternatively, the company might receive the insurance proceeds and buy in Greg’s shares, leaving Lynn as the sole owner.

Dealing with disability

In another scenario, Lynn suffers a serious illness and cannot work. The buy-sell can spell out how disability will be determined, whether Lynn will receive a salary, how long such a salary will continue, and how an ultimate buyout will be structured. Disability insurance may help to provide the necessary funds.

Defending against divorce

Considering the U.S. divorce rate and the demands of running a small business, it’s not surprising when a company co-owner has marital problems. However, if Greg is in a divorce negotiation, his wife may want a share of the company as part of the settlement—and Lynn might not welcome this additional partner.
Such a situation can be avoided if share transfers are restricted in some manner by the buy-sell agreement; the divorcing co-owner, the non-divorcing owners, or the company might be given the right of first refusal, so the divorcing spouse receives cash instead of shares. (Careful drafting is needed to avoid tax traps.) The buy-sell agreement should cover valuation, and the owners should have a plan to generate enough cash.

Ready for retirement

In yet another scenario, Lynn decides that she wants to retire while she is still young and healthy enough to enjoy her favorite pastimes. Greg intends to stay active in the business. A buy-sell can set up a plan in which Lynn steps down and is compensated for her interest in the company, perhaps over an extended time period. Some life insurance policies can be structured to fund such a contingency.

Changing directions

What if Lynn wants to leave the company at, say, age 55 in order to try another career? A buy-sell agreement may distinguish between retirement and “withdrawal” or “departure,” perhaps based on age. A buy-sell could discount the purchase price if an owner leaves after relatively few years and could delay the payout until a certain time, if that’s what the co-owners agree upon.

Personal bankruptcy

Suppose that Greg incurs a tremendous amount of debt, either from extravagant living or from poor financial decisions not directly related to the company. He might file for personal bankruptcy to get relief. Again, the buy-sell can set a procedure for Lynn or the company to buy Greg’s shares so that his creditors get cash instead of interests in the business.

Time and money

Business owners commonly work long hours and need ample cash flow for company growth. Thus, owners of a small firm might not look forward to crafting a detailed buy-sell agreement, paying attorney fees, and committing to premium outlays for life insurance as well as disability insurance. That reluctance should be weighed against the outcome if one or more of the previously mentioned trigger events should arise without a buy-sell in place. A deceased partner’s heirs may inherit shares without a procedure in place for an equitable buyout; an owner’s divorce negotiations might spill over and affect company operations.

Be Sure About Rental Car Insurance

This summer, whether you’re driving for business or pleasure, you may want to rent a car. If so, you’ll likely be driving an unfamiliar vehicle on unknown roads. What’s more, you’ll encounter other (perhaps many other) motorists in similar circumstances. You can’t overlook the chance you’ll be involved in an accident. 

Obviously, your first priority is to avoid injuring yourself, your passengers, and any others. Still, you’ll also want to minimize your financial exposure, so it will pay to have the right insurance in place.

Protection begins at home

Your first line of defense lies in the coverage you already have. Check your auto insurance policy and your excess liability (umbrella) policy to see what—if anything—they say about rental cars.

            Call your insurance agent to double check. If there is coverage, see if there are exclusions for rental cars. Does the coverage apply to long-term rentals or to rentals in a foreign country you may be visiting? If traveling for business, ask how that affects your coverage.

            If you feel your coverage is inadequate, your agent might be able to offer you additional insurance for car rentals. Weigh the added cost versus the extra protection you’ll get. Remember, your greatest exposure might be liability, if you injure someone while driving the rental car.

            After discussing your plans, send an email to the agent, summarizing the conversation, and have the agent respond, so you’ll have a record of what you were told.

Credit check

Besides your existing policies, you also may have coverage from your credit card issuer.

            Example 1: Howard Green rents a car and puts the charge on his Visa card. He skids off the road in a rain storm and causes extensive damage to the vehicle. Some or all of the repair costs may be covered by Visa. Indeed, if Howard has to pay a deductible amount under his personal auto insurance policy, his credit card coverage may reimburse him for the outlay. In some cases, credit card insurance can provide secondary coverage, paying claims beyond the limits of your primary auto insurance policy.

            Again, it pays to read the fine print. To determine what a given credit card will pay, enter the full name of the card and “rental car insurance” into an Internet search engine, such as Google. Be sure to be precise in designating the type of card you have (gold, platinum, etc.) because different cards from the same company may have different levels of protection. With Visa or MasterCard, there can be variations in coverage from one issuing bank to another.

            Credit card coverage can be valuable, especially if it’s included in the basic card member services at no extra charge, but it probably is not absolute. Often, this insurance applies to vehicle damage or theft, but not liability for injuries. In such cases, be sure you have other protection for any liability incurred while driving a rental car.

            Be wary of any exclusions in the coverage you receive from your credit card company. Coverage might not be available, for instance, for rentals of recreational vehicles, rentals of very expensive vehicles, rentals by students, or rentals much longer than 15 days.

            The bottom line is that you almost certainly will use a credit card when you rent a car. You might as well see which of your cards has the best suite of free car-rental benefits, in sync with your auto insurance, and use that card when you rent a car.

Counter moves

When you rent a car, the person behind the counter will ask you if you want the optional insurance offered by the company. The stated cost—often X dollars per day—may seem modest but in fact the annualized costs generally are much greater than you’d pay for standard auto insurance.

            Why would you pay for this expensive coverage? If you haven’t fully researched your insurance options, you might want to buy some coverage from the car rental company, for peace of mind. Alternatively, if you are informed about your present coverage, you might choose some of the optional choices to fill in any gaps.

            Example 2: Mindy Carter lives in New York City without a car, so she has no auto insurance. When she goes away on weekends, she rents a car. Mindy knows that her credit card covers damage and theft but not liability for injury to others. Therefore, she buys liability insurance at the car rental counter.

            Similarly, drivers with little or no collision damage coverage on their personal cars might buy this insurance from the rental company.

Even More on Rental Car Insurance

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