by Broderick Perkins
(8/11/2010) - Improved oil well safety protocols and faster disaster response aren't the only lessons to be learned from the Gulf of Mexico oil spill.
Some vacation property owners in the Gulf area, suffering lost income due to the disaster, discovered the hard way why sound record keeping is a must.
HomeAway.com's new Gulf Coast Response Center recently reported BP adjusted its lost income claims process to help newer vacation property owners in the Gulf oil disaster area prove past rental income, without the benefit of past tax or rental records.
HomeAway.com is a vacation rental listings portal of nearly 450,000 properties and created the center as an information resource for those who own property and those seeking to vacation in properties in the oil disaster zone.
"For those property owners who purchased affected vacation rentals within the past two years and therefore have not had sufficient time to establish an income history, then a rental income survey should be allowed as a viable alternative or documentation supplied by the previous owner should be permitted in establishing a property's rental income potential," said Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.
However, for others who've held vacation rental property for years, BP requires tax records and other proof of past rental income to process claims. These are records vacation property owners should always maintain -- in this case, so BP can compensate them for lost 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," said Jan Leasure, the managing broker at Monterey Bay Property Management in California's Monterey Bay Area, another vacation hot spot where vacation rental owners likewise would be devastated by an oil spill.
It's not just about a disaster.
Steve Gorman, president of the Monterey County (CA) Association of Realtors, says honesty is always the best policy. He also works in the Monterey Bay Area.
"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.
More than receipts
Gorman says just filing taxes and keeping receipts isn't enough.
"You must also show the relationship between the expenses of your rental business and the income, but don't try to pile on a bunch of personal expenses, calling them rental expenses. The government is wise to that approach, so be honest about what you report, Gorman said.
Some vacation property owners say BP has also asked them for "P&L" statements.
That's a "Profit and Loss" statement which summarizes revenues, costs and expenses incurred. The statement reveals your business's ability to generate profit by increasing revenue and reducing costs. The bottom line, literally, is net income, or profit.
The P&L statement is also known as a "statement of profit and loss", an "income statement" or an "income and expense statement."
"Keeping good records of your rental income and expenses is vital if you're in the rental business. Uncle Sam isn't going to take your word for it. You need to prove your expenses to the taxing authorities or they will be disallowed," said Gorman.
Leasure also said, when the economy forces tax authorities' hands, you'll wish you had the proper records.
For example, California, saddled with tens of billions of dollars of indebtedness, recently stepped up revenue collection activities by collecting taxes from property management companies that manage residential rental properties owned by out-of-staters.
"The state's Franchise Tax Board directed property manages to withhold seven percent of the rental income from out-of-state owners and send it directly to the state. The FTB gave exemptions to property owners who could show that they had filed California tax returns for the last two years," said Leasure.
Leasure says it's easy for do-it-yourself-management vacation rental owners to circumvent the normal income tax collecting process, but they might not want to.
"There is little way for a tax agency to prove anything other than what the property owner's records show. However, unexpected events can cause that owner to regret that he did not claim the income," she added.
Leasure also said lenders reject loan applications from property owners who want the lender to consider rental income that hasn't been reported on tax records.
Said Osborne, "It should go without saying, that a property owner cannot claim as earned income, for a mortgage loan app or as a loss for an insurance claim, when they cannot properly document a pattern of having legitimately received it."Refinance at Today's Low Rates!
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