For many homeowners, a spare room inside of their primary residence or vacation home also represents an income opportunity in the short-term rental market. Whether that’s additional funds for discretionary spending or a way to supplement a mortgage payment, one thing is clear: the short-term vacation rental market is growing and it shows no signs of slowing down.
With the help of technology, renting is easier than ever for both landlord and guest, which is why the private accommodation market is expected to hit $36.6 billion dollars by the end of 2018.
But, for many homeowners, that extra nugget of income comes with many new responsibilities as well, and if they aren’t compliant, that additional source of income may become a tax and liability nightmare. Just as the short-term rental market has become increasingly popular over the past few years, government agencies are also increasing enforcement tactics to ensure short-term rentals are properly registered and homeowners are paying the correct taxes. The key to short-term rental success is to treat every property as a business, no matter how short the stay or how small the transaction.
Here are three ways to get on the right track to running a short-term rental like a business.
Get licensed and insured
The first step is to obtain all appropriate licenses or permits to rent legally in the homeowner’s area. The legal definition of a “short-term rental” varies by location and ranges from rentals of less than 28 days to up to 185 days. The bottom line is that a short-term rental is considered a business and is subject to the same laws, regulations, and taxes as any other business.
This means registering with tax agencies and obtaining any necessary licenses, permits, or applications from the county, city and state. In addition, most homeowners’ insurance policies won’t cover short-term rentals, so it’s important that the right additional insurance is in place to protect the property and the owners in the event of an incident.
While many homeowners understand that any net income from a short-term rental is subject to taxation on their personal or business income tax returns, many fail to realize that lodging taxes are completely different. They are a type of sales tax on lodging transactions and must be handled separately. Also, not just the nightly rate is taxable. Cleaning, pet, extra person or any other mandatory fees associated with the rental may also be subject to lodging taxes. Guests actually pay these taxes, but it is ultimately the homeowner’s responsibility to see that those taxes are collected and paid to the right agencies.
However, paying those taxes isn’t as simple as sending a check. Many homeowners base tax calculations on zip codes, but relying on zip codes isn’t accurate. Oftentimes, zip codes have multiple tax rates depending on the state, city, county, and even special tax jurisdiction boundaries that are unrelated to zip code definitions – and those tax rates are subject to change. Returns must be filed monthly or quarterly, depending on location.
Also, homeowners must still file returns even if there is no revenue for a given time period; in other words, one must still file a $0 return. Many states require taxes to be paid within 30 days, and failure to pay on time can result in penalties and interest on top of any back taxes owed – and that doesn’t even account for city or other local taxes.
Automate to alleviate
Many homeowners are turning to software to automate their compliance obligations associated with short-term rentals. While rental platforms such as Airbnb collect lodging tax in some areas, they may only cover a portion of what a homeowner may owe – for example, only the state tax component. These platforms often do not cover all of the lodging taxes for a property. This puts homeowners in a precarious position where they must understand what lodging taxes they are still responsible for and stay abreast of ever-changing tax laws, or risk being on the receiving end of penalties or a hefty tax bill. Software solutions for tax compliance offer an affordable way to efficiently manage lodging tax obligations for short-term rentals. Some solutions enable homeowners to obtain any necessary licenses or registrations needed.
Well-built software solutions should determine the specific lodging tax requirements by jurisdiction and automatically file any tax returns and remit any payments. Compliance software services should actively update their content whenever there are regulatory or taxation changes, which can help protect homeowners from surprises later on. As more and more homeowners are dipping their toes into the short-term rental market, it’s more important than ever to view this income source as a business that requires both commitment to and compliance with the rules and regulations.
By managing a short-term vacation rental like a business and automating with technology where appropriate, homeowners can not only stay compliant and abreast of tax requirements, they can also enjoy their newfound income without the headache.