Tax Forms That Could Save Me Money? Yes, Please.

How Vacation Rental Owners Can Decide Between Filing a Schedule E or Schedule C 

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Should you file a Schedule C or Schedule E for your vacation rental property income? Finding the right answer to this question can save you 12.4% in self-employment taxes.

As a vacation rental owner, you probably have read about the tax form 1040, broken down into Schedule E and Schedule C. From the IRS website:

Use Schedule E (form 1040) [https://www.irs.gov/forms-pubs/about-schedule-e-form-1040] to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs).

Use Schedule C (Form 1040) [https://www.irs.gov/forms-pubs/about-schedule-c-form-1040] to report income or loss from a business you operated or a profession you practiced as a sole proprietor. An activity qualifies as a business if: Your primary purpose for engaging in the activity is for income or profit. You are involved in the activity with continuity and regularity.

Cool — I bet it sounds like you could fit into either category. Which one is right for you as an Airbnb, Vrbo, or other vacation rental proprietor? Let’s break it down.

Schedule C Deep Dive

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With the gig economy well into flight, you probably know that independent contractors use Schedule C, the “Profit or Loss From Business (Sole Proprietorship)” form 1040. Most independent contractors — like freelancers, consultants, self-employed business owners, and the like — use Schedule C to report both their income from said self-employment, as well as their losses. 

Schedule C is recommended for sole proprietors who are:

• New business owners who are just starting out their company — yes, this includes vacation rental property owners who gain any income from renting their property, whether it is a residential home, condo, or other structure listed on a site, such as Airbnb or Vrbo.
• Business owners who earn very little profit, no profit, or lose money as the business gains traction. For example, this could include vacation rental owners who only rented their property a couple of times, which may not be enough to cover the existing mortgage, utilities, property taxes, landscapers, and house cleaners. Losses could also be attributed to vacation rental owners purchasing beds, couches, dishes, toilet paper, laundry detergent, and any other item that resides in the rental property for the use of its renters.

Schedule E Deep Dive

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If you think that Schedule E, or “Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.)” form 1040, is right for you — a vacation rental property owner — then you’re probably right! However, note the qualifier “probably”. Let’s take a look at Schedule E. 

Schedule E is an appropriate form to file if:

• You utilize your rental property as supplemental income — not as your employment income
• You earn any supplemental income from royalties, trusts, estates, and Real Estate Mortgage Investment Conduits (REMICs)

To sum it up, Schedule E would be appropriate for vacation rental owners to file if they are not an established rental business, but rather just a homeowner earning some income when they are not utilizing the property themselves. 

Differences and Similarities Between Schedule C and Schedule E

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If you’re still unsure and confused by which form is best for you to submit, that’s ok. Many people feel like they can relate to the descriptions defined by each form. For example, maybe you’re just starting out in the vacation rental business and right now it’s a supplemental income as you get your footing, but you have been ramping up to make it an “official” part- or full-time job. 

While both Schedule C and Schedule E look very similar and ask about income and expenses, their tax ramifications are very different. 

[BOX 1 of Similar Information]
If you file Schedule C, you MUST pay self-employment taxes. Currently, that rate is at 12.4%.

If you file Schedule E, you do NOT have to pay self-employment taxes! Thereby, you are saving 12.4% of your rental property income. 

[Box 2 of Similar Information]
Are you running a loss with your vacation rental property? If so, Schedule C gives you the opportunity to offset regular earned income.

You cannot offset regular earned income if you run a loss and file Schedule E.

Which Schedule is Best For Me?

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The crux of the question: What does Schedule C or Schedule E mean for me, the vacation rental owner?

Vacation rental owners are like mini-real estate investors. You may not own a whole development, complex, or town (if you’re fancy). Rather, you likely have one or two condos or homes that you’re renting out when you’re not using them yourself. Therefore… drumroll please … you’re most likely eligible to file Schedule E.

Tips to Prepare for Filing Schedule C or Schedule E

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Regardless of which form is right for you, be sure to:

• Keep good records of all expenses and income
• Back up all of your records in case your computer crashes
• Use Perch to get a full picture of how you’re doing with each property and are ready to file your taxes or give your CPA what they need — all while barely lifting a finger.

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