Tax Law (Questions About Taxes)/Schedule E Rental Income

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QUESTION: Hello,

My wife and I are Colorado residents and purchased a fractional ownership (20%) condo in Maui in 2013. All 5 owners are entitled to two 5 week periods (70 days) per year.

Some of the owners used their personal days last year (more than 14 days). My wife & I rented out 42 days and did not use the other 28 days. We paid commissions to another owner who keeps the books and also paid Hawaii GET tax. Our net rental income was $4922.

We make over $150K from pensions and dividend income thus do not qualify for a deduction. Expenses/maintenance exceeded income by over $6000.
1) For Schedule E, (Type of property) is the condo considered a single family residence or short-term rental?

2) Are the 28 days that we did not use the condo considered personal use days (Schedule E, line 2A) or do we just enter 42 rental days since the unit was vacant ?

3) Since rental income was generated in Hawaii, I assume that we must file non-resident Hawaii tax form N-15. When I enter the $4922 rental income on Schedule E via Turbo-tax, nothing transfers over to the Hawaii form. Is that because we had no reportable income or should I manually enter $4922 for Hawaii income?

4) My wife will start doing the rental bookings this year and will collect 15% commission on all rentals. Where and how is that income reported on both the 1040 and Hawaii N-15?


Many thanks

ANSWER: John:

It appears that a partnership has been formed.  Therefore, the partnership must file an information return reporting all transaction for the year and apportioning each partners reportable information on the K-1 form.

In short I do not have enough information concerning the rental property in total.  The property was purchased I assume by more than one person.  The purchasers as a group decided what days would be their individual days to posses the property and receive all benefits on their days of possession.  However, they as a group own all rights to the property.  The un-sold days are not a loss they are days on which you did not receive any income.  From the income that you did receive you get offset the expenses you incur up to the total of the income you received.  The reason being that you did not manage the property.  Only owner/manager of rental property get to deduct a loss.

I do not know anything about Hawaii's income tax law nor the reporting requirements.  I assume that if the information is put into turbo tax correctly it will calculate the correct tax due in a state return if any is owed.  I know they have a hot line to call rewarding any information that is not working correctly.  I have used turbo tax since 1988.


John

---------- FOLLOW-UP ----------

QUESTION: Thank you for the info, John.

There are 64 condo units in a building and I am one of 5 owners of a single unit. We do pay a monthly maintenance fee to an on premises company.  

We purchased our individual 1/5 share through a realtor who specializes in fractional ownership sales. We received an interval warranty deed from the state of Hawaii. For tax purposes, it is considered a time-share by the Maui assessor but it is not similar to owning 1 week out of 52.
I guess legally a partnership has been formed however none of the other owners (some who have owned for more than 10 years) has ever received or issued a K-1. The owners tend to use the unit for personal use but when they cannot, it is rented out through one of several web-sites. There is no owner-manager other than a company whom we pay to send in cleaners as well as inspect before and after each rental.
Each owner is pretty much considered an owner-manager of his own time although my wife now handles the bookings and collects a commission. Hawaii requires an on-island management company but they have nothing to do with managing the property. One company maintains for which we pay a monthly fee; another company administers the cleaning; we also send them the collected tax to send to the State of Hawaii.
Hopefully that clarifies some things.

I would also still like to know where on the 1040 we should report the commissions collected to rent out the unit. For example, if the unit is rented for $100, we also collect 13.42% tax. We keep $15 as commission, send 13.42 to the State and $85 goes to the owner of that particular week.
As owners, we report $85 as rental income but where do we report the $15 commission since it is not really part of the rental. Can we consider ourselves self-proprietors and claim it on a Schedule C?

Thanks again

John

Answer
John:

Since you rent it out and also stay in at times it is an investment property.  You can file I believe a Schedual E income/loss on rental property should be used.  The commission received could be lumped in with the rental sales to off set your expenses.  You would be a proprietor but you can not pay yourself to rent your own property.  Your pay is either profit or loss.

I believe Schedule E is your form.

John

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John L. Tidwell

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Unemployment tax law both state and federal; determination of employer employee relationship; the usual 20 commonlaw factors for making that determination; and what makes me a liable employer.

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Over 20 years of field audit experience with a state agency

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Degree in Accounting from Falls Business College

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