My family owns a cottage in Wisconsin that we use for vacations in the summer time'This past summer, some friends wanted to use the cottage and they insisted on paying us for the time they spent there'Do we need to show this money on our tax return? And since I own this cottage with my brother and sisters, should we split the money evenly on all of our returns?
The key question here is, did your friends stay at the cottage for more than 14 days? The IRS allows 14 days of rental income to slide by tax free, if there are no other rental days in the year'Rent the place for 15 days or more, however, and all of the rental income is taxable.
If you fall under the 14-day umbrella, report no income from the cottage on your tax return'If you received money for 15 or more days, the amount of money you received is taxable, but you can offset this amount by deductions for the prorated cost of maintaining the cottage'You already, presumably, take deductions for the mortgage interest, if any, and real estate tax that is paid on the cottage.
In addition, you can take the cost of utilities and other maintenance for the year, divide this amount by 365 days in the year, then multiply the result by the number of days your friends were using the cottage'For example, if the cost of utilities and maintenance for the year is $1,800, that equates to $4.93 per day'If your friends paid to stay at the cottage for 21 days, you have a deduction of $103.53 which can offset some of the income they gave you.
If you are reporting the income from renting the cottage, you should also take a deduction for depreciation on the cottage'The calculation for depreciation varies depending on when the cottage was acquired and whether or not it has produced taxable income in the past'Because depreciation calculations can get a little squirrelly for rental property, I'm going to suggest that you get your hands on IRS Publication 17, Your Federal Income Tax to help you with this calculation'You can call the IRS at 1-800-TAX-FORM to request this publication, or you can download the booklet at the IRS's web site, www.irs.gov . Taxable income and related expenses from rental property get reported on Schedule E, 'Supplemental Income and Loss.
And as for the question about who gets to report this on a tax form, the answer is: whomever received the money'If your friends gave all the money to you, and you didn't divvy it up with your brother and sisters, then you get to deal with the tax man all by yourself'If the money was divided evenly, and you and your siblings share evenly in expenses, then each of you will report your share of the income and expenses on your own tax forms.
Roth Rules Resurface
In other news, taxpayers who own Roth IRAs and who converted regular IRA funds to their Roth accounts during 1998, still have until December 31, 1999, to switch their money back to the regular IRA account without any tax penalty.
You can only switch money from a regular IRA to a Roth IRA if your adjusted gross income for the year is $100,000 or less'One other irritating little rule is that you can't make the switch if you used the married filing separately status but lived with your spouse for any time during the year.
If you switched regular IRA funds to a Roth and have only now figured out that your income last year was too high or you used the wrong filing status, the IRS has decided to give you until 12/31 to straighten things out'Switch the funds back to your regular IRA by calling your friendly IRA trustee and telling him what you want to do'Then file an amended 1998 return to tell the IRS what you did, so the IRS can rest easy and get back to the job of fixing their computers in time for the millennium.
copyright © 2000 Gail Perry - Fun with Taxes