Vacation Rental Owner Blog

Your odds of being audited by the IRS are greater under the following circumstances:

• You have rental expenses on your tax return.
• You have large amounts of itemized deductions on your tax return.
• You claim tax shelter investment losses on your tax return.
• Your business expenses are large in relation to your income on your tax return.

Yikes!  That’s me!  To be fair, the odds of an IRS audit are low (like less than 1 out of 100 people low).  There just aren’t that many agents to read through everybody’s return.

However, as a vacation rental owner, you have immediately put yourself into a category of filer that will trigger an audit more often than the average American (we’re still only talking 1 or 2 out of every 100 people).  Don’t panic – I’m here to help!

Being a vacation rental owner offers you many tax breaks unavailable to most folks.  Heck, that’s part of the lure and financial perks you are entitled to!  So don’t worry, you just need to keep records of your expenses so you can take your legitimate write-offs and, if the tax man ever comes knocking, you can sit back and relax.

I’ll cover more of the financial setup of a vacation home owner in other blog post (keeping separate checking accounts, using software such as Quickbooks), however this post is about keeping proof of those expenses.  If you are audited, you will need receipts of your expenses.

You can hand the auditor over a box full of receipts for him to pour through, but unless you have a smile like Maggie Gyllenhaal that can persuade Will Ferrell to just ignore this audit, you’ll want to organize and save those receipts.

Here are solutions I’ve tried:

1. The Envelope Method

Keep receipts in a big envelope/box labeled “Condo Receipts 2008″ and put your receipt in there every chance you get.  This is fine, but suffers from a few issues.If you need to go back a month or so later to review a receipt, it’s a little cumbersome.  Another issue is lack of backups.You might as well label the box “Receipts 1982″ because this method is so 1980′s.

2. NeatReceipts

Scan your receipts and store them on your computer.  About 3 years ago I tried NeatReceipts for about a year.  While it is great in theory, I found the software pretty slow and bloated.  Way too many features for my needs and I felt it actually kept me from scanning my receipts too often.

Waiting for the software to load just to scan a single receipt was excruciatingly slow.  Slow like waiting on a contractor to finish that bathroom remodel he said would only take 2 weeks.  Riiighht.

Backup the NeatReceipts database on your computer with backup software such as Mozy for when (not if) your computer crashes!

3. PaperValet

I found this nice little tool after getting frustrated with NeatReceipts.  PaperValet is a very basic piece of software for about $25 – it scans a page and puts it on your computer as a PDF organized by category and date.  Perfect!

I actually used the scanner that came with NeatReceipts since it’s perfect scanning receipts.  I then created folder called “Condo Receipts” on my computer with categories and PDF files in those folders.

Backup that folder with backup software such as Mozy.  Unfortunately, this solution suffered from the same issues I had with NeatReceipts: I am lazy and wouldn’t scan the receipts.

4. ShoeBoxed

Hallelujah!  My current and favorite solution is Shoeboxed.  This is a receipt scanning solution sent from heaven!  You simply pay a flat annual fee and mail your receipts to them.  They scan them and put them online.  Wow!  This is the part of Web 2.0 that makes my life easier.

I’ve used this for a few months and I am already sold on this service.  The OCR is amazing – all of my receipts have been perfectly organized and tallied (I’m not sure if they have humans double-check each scan or if their OCR is that good).

Shoeboxed is making backups of your receipts, so you don’t need to worry about that.  However, you can always download a PDF or spreadsheet of all your receipts at any time.  Once a month I download all my receipts as a PDF just for piece of mind.  Oh, they’ll also send you a CD/DVD of all your receipts as well.

One other cool feature I like about Shoeboxed: If you use a single credit card for all your rental expenses (which you should), then Shoeboxed can immediately show you all your receipts from that single credit card.  Pretty spiffy!

What other methods have I missed?  Leave your comments below.