Vacation Property Lessons From The Gulf

In the wake of the oil spill in the Gulf of Mexico, BP has come up with ways to streamline the claims process for those business owners who have lost income due to closed oil soaked beaches and lack of tourism in the coastal resort towns near the effected areas. This includes homeowners who use their property as vacation rentals during the summer.

For real estate investors who have been renting out their properties for many years, BP is requiring that they provide copies of previous year tax returns to establish the rental income history. They are authorizing a payment plan of the equivalent of three month's rental fees. The problem that some of these homeowners are having is that they haven't always claimed the income from their rental business on their taxes. Without this documentation, they don't have a way to prove that they, in fact, receive business revenue from their property. According to a recent article at Realtytimes, many homeowners are upset because they knew that the should have done things differently with their business, and now they aren't able to prove the loss of income.

"Should" is the operative word. "It's difficult to ask for compensation for lost vacation rental income when your tax return does not reflect that you ever earned any income from a vacation rental home."

Keeping records is vital for any type of business, and real estate is no exception. Even just claiming the income on your taxes isn't enough, as with any business, you need to keep a profit and loss statement. P&L statements are easy to do yourself with a simple spreadsheet program. While there are several good ones you can buy, there are even free, open source programs like Open Office, by Sun Microsystems. Basically, a profit and loss statement is just a place where you can keep track of your business income and any business expenses or losses you may have had. This will give you a clear idea of what your net income from the property is and make it much easier when you file your taxes. And paying the taxes on your income is not only a good idea, it is the law. When you attempt to handle things under the table, it can come back to hurt you later, and you will be without the means to prove the income you actually received and the actual expenses you have paid. If you were to be penalized for not reporting the income, the IRS would have to estimate what your income would have been, and they would use the highest figures possible.

"This should go without saying, but failure to report all of your rental income can be income tax fraud. Ask yourself, 'Is it really worth the risk doing it the wrong way?' The answer should be, 'Of course not. What the heck was I thinking?' " said Gorman broker/owner of Gorman Real Estate in Pacific Grove, CA.

The bottom line is, real estate investing and rentals is just like any other business, you have to set it up the right way and keep records. Often, a home buyer will purchase a property with the plans to rent out only a portion of the property or decide later when they want to relocate that rather than sell their property they will keep it as a rental. This sort of “stumbling into” becoming a landlord and business owner can make people careless, thinking that it really isn't an actual business. It is. Take the time to do it right and you'll be happy later that you have.

By Melissa Kennedy- Melissa is a 9 year blog veteran and a freelance writer, along with helping others find the job of their dreams, she enjoys computer geekery, raising a teenager, supporting her local library, writing about herself in the third person and working on her next novel.