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Military Finances 301: Schedule C or Schedule E? Thumbnail

Military Finances 301: Schedule C or Schedule E?

Investment Managing Your Finances

So, you’ve decided you’re going to rent out the downstairs apartment to make a little extra money. Or maybe you scored a beach house and you’re going to rent it out until you can retire, retire and move into it full time. You’ve had a couple of rental houses during your military career so you’re familiar with the Schedule E and plan on reporting your rental activity on a Schedule E again. But should you? Maybe not. You may be operating a business and need to report the income and expenses on Schedule C. Or, you might not be operating a business, and you’ll report your income and expenses on Schedule E. How do you know? Well like most things in the tax code, the answer is not written in black and white. Here are the things the IRS considers.

When Do You Report Rental Activity on Schedule C?

In general, if the average length of rental is 7 days or less, you are conducting a trade or business, and the activity will be reported on Schedule C. But that is not the only situation where you ‘ll report on Schedule C.

You are also considered to be conducting a trade or business if your average customer use is 30 days or fewer and you provide substantial significant services. The IRS says you are providing substantial services that are primarily for your tenant’s convenience. They mention the following examples:

  • Changing Linen
  • Regular Cleaning
  • Maid Service
  • Free Wi—Fi usage
  • Iron and ironing board
  • List of activities and restaurants in area

The following are not considered services

  • Heat
  • Water
  • Electricity
  • Trash & garbage collection
  • Janitorial services (of common areas)

Based on the above, it doesn’t take much to find yourself providing services

When Do You Report Rental Activity on Schedule E?

The short answer is when you’re not required to report it on Schedule C. A good way to think of it is if you are providing shelter without much of anything else, you report on Schedule E. The shelter can be furnished, but you’re not providing services.

Length of stay would also help determine where you report. If your average rental length is greater than 30 days, you most likely are running a rental versus a trade or business.

As always with the tax code, it comes down to your particular facts and circumstances.

What Difference Does It Make if I Report on Schedule C or E?

The form will determine taxation. If you report on schedule C and have a profit, you have self-employment income and are subject to self-employment taxes (Social Security and Medicare) at a combined rate of 15.3%. Profits reported on Schedule E are not subject to self-employment taxes. Income from either form is subject to income tax at the same rate and both can qualify for the Qualified Business Income (QBI) deduction.

Losses are a little more complicated. If you report your rental activity on Schedule E, you may be able to deduct up to $50,000 of losses (subject to phase out starting at $100,000 AGI and fully phased out at $150,000 AGI), if you actively participate in the rental activity. If you do not actively participate or if your income exceeds the phase-out limit, the losses are not currently deductible and will be carried forward until you can deduct them (you have passive income or you sell the property). More likely than not, losses on Schedule C will be deductible (but it isn't guaranteed)

Military Finances are Different

I think Active and Retired Senior Military Officers and NCOs are a little more likely to end up with rental properties than their civilian counterparts. That isn’t the only way your finances are different than a civilian. That’s why we think you should work with a financial planner/advisor that works with Active and Retired Military Members each and every day. If you’d like to see how we work with people like you, use the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

So, You Want to Be a Military Landlord

Military Landlord? You Have Estate Planning Issues

Military Finances 301: Should You Buy a College Condo?

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