Taxation Issues for Fulltime RVers

Taxation Issues for Fulltime RVers
February 19, 2003
© 2001 Arthur G. Knapp. All Rights Reserved.

According to an article in the Detroit News, there are more than one million Americans that have passed up the life of urban sprawl in favor of traveling the country in their recreational vehicles. Many of these people work in their RVs as they travel, or work at different locations as they travel across the country. The income tax consequences of choosing this fulltime lifestyle are addressed in this article.

In the Beginning

After the decision has been made to live full time in an RV, many people are faced with selling their home and disposing of a lifetime of possessions. While this is a stressful situation for many, the Internal Revenue Service has at least made it less painful in two ways.

1. The gain on the sale of your personal residence can be excluded from your income (up to $500,000 on a joint return, or $250,000 on the return of a single person). In order to qualify for the exclusion, the residence must be the taxpayer's personal residence. The residence must have been owned and occupied by the taxpayer during two of the preceding five years. (This exclusion replaced the old law one-time exclusion of $125,000 for taxpayers 55 or older).

In order for a married couple to use the $500,000 exclusion, either spouse can satisfy the ownership test; both spouses must meet the use test, and neither spouse may have used the exclusion within the last two years.

The two years of ownership and use do not need to be continuous. Any 730 days of ownership and use (short absences such as vacation are counted as use) during the five years before the sale will meet the test. Also, the ownership and use may be met at different times, as long as both tests are met during the five-year period before the sale.

The ownership of stock in a cooperative housing corporation is equivalent to ownership of a residence. The exclusion would apply to the sale of the stock if the taxpayer owned the stock for at least two years, and the seller lived in the apartment or house for at least two of the five years before the sale.

There are special hardship rules that apply in case the two-year ownership and use requirements are not met because of health or a change in place of employment.

The exclusion does not apply to the extent of any depreciation taken after May 6, 1997. For example, if you owned a rental property and claimed depreciation on that property for 1997 and 1998, then occupied the property for 1999 and 2000, and then sold the property during 2001, gain would be taxable to the extent of the depreciation after May 7, 1997.

2. When disposing of their accumulated treasures, taxpayers should keep in mind that the Internal Revenue Code allows a deduction for contributions to qualified charities. The items that taxpayers don't give to family or store for future use can be contributed to charitable organizations. The lower of cost or fair market value of the property donated is allowable as an itemized deduction. (If you give away a pair of shoes that cost $95 and can be sold by the thrift shop for $20, your deduction is $20). Because of special rules regarding contributions of appreciated personal property, you are probably better off selling those Barbie Dolls than contributing them to charity.

A written receipt must support a contribution of $250 or more. The receipt must include a description of the property and a good faith estimate of the value of the property. It is a good idea to photograph the property and present the charitable organization with a detailed list of the property.

Some people have the misconception that non-cash contributions are limited to $500 in a year. This is not true. If the total of the non-cash contributions exceeds $500, an additional form (Form 8283) must be attached to the tax return. This form simply provides more detailed information (such as date of contribution, name of the charity, how valued, how acquired, date acquired, and description of property). This sounds difficult, but the form is actually quite simple to complete.

If a taxpayer donates over $5,000 of non-cash items, they must obtain a qualified appraisal if the aggregate of similar non-cash items exceeds $5,000. The appraisal summary, made in Section B of Form 8283 must be attached to the tax return.

Buying the RV

Frequently, people that decide to join the fulltiming lifestyle decide that their current RV is not suitable for their new lifestyle. Again, Uncle Sam is going to help us out a little.

For fulltimers, their RV is their primary residence. As such, any interest paid on a loan to acquire or substantially improve the RV may be deductible as qualified mortgage interest. In order to qualify for deduction, the RV must secure the loan. This is comparable to the rule for foundation homeowners where the loan must be secured by the home.

For those that continue to maintain a foundation home, an interest deduction is available for both the foundation home and the RV. As long as the second home (in this case the foundation home) is used for more than 14 days during the year (no use is required if it is not rented out during the year), it will qualify as a second home or "vacation" home. The interest on the loan secured by the foundation home will be deductible as qualified residence interest. For the interest to be deductible, the loan proceeds must have been used to acquire or substantially improve the house, or be a home equity loan of $100,000 or less.

The interest on an RV loan can even be deductible by "part timers" who maintain a foundation home as their primary residence. To qualify the loan must be a qualifying home Equity loan (under $100,000 and secured by the foundation home) or a loan used to acquire the RV that is secured by the RV.

For fulltimers with complex tax returns and high income, please note that the interest deduction for computing Alternative Minimum Tax (AMT) is slightly different. Interest on refinanced loans is only deductible to the extent of the balance remaining on the acquisition loan at the time of the refinance. For AMT purposes, interest on home equity loans is not deductible.

Choosing a State - Your Domicile

Few legal concepts are more important and less understood than domicile. Your domicile, or state of legal residence, is important because it determines if or where your income from such items as pensions and annuities, dividends, interest, capital gains, and partnership income will be taxed.

The terms residence and domicile are often used to describe the same thing. However they are not the same. Your residence is the place you are living at the present time. For an RVer, this can change frequently throughout the year. Domicile is the place (the state) that you intend to make your permanent home, and the place you intend to return to. It is quite possible to be a resident of a place without being domiciled there.

There is no law that says where your domicile has to be. There are however, state laws that define residents of a state for various purposes including taxation and voting. The fundamental principles of domicile are:

1. Every person has only one domicile at any given time.

2. An old domicile continues until a new domicile is established.

3. A person acquires a new domicile by actually establishing a dwelling place in the new state with the intention to remain there. The physical presence and intention must normally occur simultaneously.

4. The motive for changing domicile, such as saving taxes or securing a divorce, is irrelevant if the required physical presence & intention occur.

What your domicile is and whether you have established a new one (intentionally or inadvertently) can only be determined by an analysis of the facts in each case. Because the ultimate question is one of intent you must be able to point to specific objective factors that demonstrate your intent to make a place your permanent legal residence. The following factors are examples of those considered when locating your present domicile or in deciding whether a new domicile has been established:

1. Physical presence.

2. Location of the remainder of the immediate family.

3. Voting registration.

4. Ownership of real property.

5. Payment of state income and property taxes.

6. Registration of automobiles and drivers license.

7. Location of investment bank accounts.

8. Business connections.

9. Participation in local affairs, civic groups, etc.

It is important to note that the above factors work both ways. A state that you do not consider your domicile may use the above factors when trying to collect state taxes or otherwise consider you a legal resident of that state.

Because of their lifestyle, fulltimers are able to choose any state they wish as their state of domicile (legal residency). In order to reduce expenses, many fulltimers will pick a state with little or no income tax as their state of domicile. These states include Alaska, Washington, Nevada, Texas, South Dakota, Florida (intangibles tax) or Tennessee (dividends & interest tax).

Other issues should be considered when choosing your domicile. These issues include cost and availability of fulltimers vehicle insurance, cost and availability of medical insurance, cost and ease of vehicle registration and drivers license renewal. If you anticipate major purchases (a new RV) the sales tax rate may also be a consideration. If you already own an RV, is there a one-time fee or tax for bringing it into the state (South Dakota)?

Working Fulltimers

Many fulltimers, in order to reduce expenses, may work at an RV Park or campground. The worker may receive a small compensation plus a free on-premises RV space and hook-ups. This type of arrangement has become known as "Workcamping".

It is an established tax concept that the value of lodging provided by an employer on the employer's premises that are a condition of employment is not taxable. Further, certain meals provided by the employer on the employer's premises are not taxable.

It is important that the employer-employee relationship be documented. An employment document specifying the details of the arrangement, including the requirement that the workcamper live on-premises is highly recommended. The document should outline the work duties of the fulltimer. There should be a value established for the meals and lodging being provided. Be sure that the employer is treating you as an employee (will issue a W-2) as opposed to an independent contractor (a 1099). There is a danger, especially in the case of a workcamper who receives only free lodging (no cash payment), that the transaction will be classified as a "barter" arrangement. If it is determined that the transaction is not between employer and employee, but is a barter arrangement, the full fair market value of the RV space provided is includable as taxable income.

If an RVer is selling product as he or she travels, it is important to know the sales tax rules of each state in which sales are made. Before collecting or not collecting sales tax, the RVer should consult with the state’s sales tax department. Many states have information available on their web-site.

The Office

Not all fulltimers limit their employment to Workcamping. Many fulltimers continue to work full or part time as they travel. There are fulltimers that make their living as writers, photographers, RV consultants, RV technicians, software engineers, computer consultants, traveling nurses, and many other technical and professional occupations that can be accomplished while traveling. All of these working fulltimers should be concerned with the possibility of state taxation. Many of them will need to prepare income tax returns for several states. They will need to guard against becoming the target of an aggressive state that wants to tax their total income, not just their work related income.

An issue that may be relevant to many taxpayers is the Home Office. Self-employed fulltimers who file a schedule C may be entitled to substantial deductions for use of part of their RV as their home office. (Employees are also entitled to a home office deduction, but only if it is required by the employer.) If your RV qualifies as a home office you can write off a portion of your RV interest, insurance, repairs, camping fees, utilities, registration fees, and depreciation on the RV.

It will be difficult, but not impossible for a fulltime RVer to have a qualified home office. In order to qualify, you must have an area (not necessarily a room) that is used regularly and exclusively for your business needs. For fulltimers, the difficult part will be having an area that is used exclusively for business. (The author had such an area for his CPA practice as he traveled the US with his wife and teenage son).

There are three ways to have an area qualify as being used as a home office:

1. A placed used to store the inventory of items sold in your business.

2. The place where you meet with your customers or clients.

3. The principal place of your business.

The tax law recently changed to allow a deduction for an office even if your work is all done outside of the RV. If you use the home office for doing the paperwork, making or returning calls, and other administrative functions, it can still qualify.

The deduction for the home office is computed using IRS Form 8829. The amount of the RV expenses that will be deductible is determined by the ratio of the home office square feet to the entire RV square feet. A self-employed person takes the deduction on Schedule C (the deduction is not allowed to reduce income below zero). An employee takes the deduction on Schedule A (Itemized Deductions).

An incidental benefit of qualifying for a home office is a greater deduction for business use of your car or truck. If you have a home office, your commute is from one side of the RV to another. Any usage of your car or truck for business (visiting a job-site or customer, doing research for a book or article, taking photographs for publication, etc.) becomes deductible as soon as you leave the RV. You can compute your automobile deduction using actual costs, or use the standard mileage allowance (currently 36.5 cents/mile).

A photograph of the office area may be valuable in the case of an audit. It may keep the agent from having to visit your home office.

A State Choosing You!

Fulltime RVers may encounter complex issues regarding state income taxes, even if they have chosen a domicile in a state with no income tax.

Obviously, if a fulltimer earns money in a state with an income tax, that state will require the payment of tax and filing of an income tax return. Of course, one would assume that the only income that would be taxable would be the wages or self-employment income earned while in that state. Well, that is not necessarily true. Based upon many variables, the most important of which is the length of time spent in the state, you may actually be determined to be a resident or part year resident of a state (even if you don't work in the state). This can be significant. To the fulltimer, this means that the state has the right to tax all income (pension, interest, dividends, capital gains, etc.) earned during your "part-year resident” stay. In fact, it is quite possible that a working fulltimer could be considered a "part-year resident" of more than one state during the same year. For fulltimers with pensions and other "passive" income this could be disastrous, especially if high tax rate states like California or Oregon are involved.

In an attempt to get "their share" of the tax dollars, states are becoming more and more aggressive. As an example, a new Montana law provides that if a person claims to be a Montana resident for a particular purpose, then he or she is a Montana resident for all purposes (income taxation). This will make persons purchasing and registering vehicles in Montana (in order to avoid sales tax) subject to income taxation in Montana. This is probably exactly what Montana had in mind when enacting this law.

Each state will have it's own rules and regulations that it uses to determine whether or not you are a resident for income tax purposes. There is no uniformity. If a fulltime RVer is going to work in a state, or owns real property in a state, has registered vehicles in a state, or will spend a significant amount of time in a state, it would be advisable to be aware of the tax laws considering residency in that state. Most states have a publication that explains their residency rules. Many states will have this information available on a web site.

The Paperwork

All taxpayers are responsible for keeping tax records. It may just be a little more challenging for a fulltime RVer to find the space. RVers who have a possibility of state taxation as nonresidents or part year residents should keep especially good records detailing time spent in each state.

The Internal Revenue Service requires you to keep your tax records for a minimum of three years after the due date of the original return. Many states add an additional year to that time period.

I would recommend keeping the actual tax return copies, W-2's, and cancelled checks for payment of tax for seven years. They don't take up that much room, and trying to get copies later will be difficult.

Conclusion

Fulltimers face some interesting tax challenges. The lack of uniformity among states and the fulltimers' lack of a fixed home, may allow states to raise some issues that could be costly to the RVer who is not prepared. Fulltimers with complex income tax issues, especially residency questions may be wise to seek competent professional advice.