The hottest trend for adding another income stream to your assets is turning your residence or rental property into a short-term rental. Third-party vacation booking sites like Airbnb, VRBO, and HomeAway offer homeowners the chance to rent out unused portions of their homes in turn for a little extra cash in their pockets. The homeowner operates independently of the booking site and is in full control of how often they rent or who they choose to rent too.
Sounds pretty good, right?
Running a short-term rental can be a very lucrative way to turn what you earn into a few extra bucks each month, or even seasonally. But if you’re not careful, it could end up drastically eating up your profits, making it a liability instead of an asset.
If you do not have a clear understanding of the rules and the tax implications of running a short-term rental your profit can be significantly less than what you thought. You may have just spent time, money, and energy on an investment that is not worth the return.
Before You Start Renting:
Start with the 3 C’s: Calculate. Calculate. Calculate.
For the recreational renter, it may be a no-brainer, but there is a strategy that allows you to rent your property tax-free for up to 14 days.
For those who have secondary residences that they rent for significant portions of the year the strategy is drastically different, but being a high-volume renter also provides you with a greater opportunity to defer some of the tax burden and risk that short-term rentals carry with them.
When looking at short-term rental opportunities there are several factors in determining what structure or strategy is best suited for the individual’s situation, and you should be looking at these factors as well so you can get a finger on the financial pulse of your investment and the implications of having a short-term rental in your respective states.
The Two Strategies to Consider:
Strategy #1 – The Occasional Renter Strategy
If you are only renting out your property for 14-days or less, you may be exempt from paying taxes on the money you earn. The moment you go over 14 days, without the right business structure the IRS may come in and smack you with some pricey taxes on that income. In most cases, it will take another 16 days for renters to bring you back to the income you would’ve made in 14 days, creating a vicious income vs tax cycle. So if you’re a seasonal or recreational renter, keep this strategy in mind.
Strategy #2 – Secondary Residence Renters
For those who rent out properties that are not their primary residence, depending on how many days you rent for, your tax strategy will be drastically different. Being a high volume renter provides you with a greater opportunity to defer some of the tax burden and risk that your short-term rentals will carry.
When deciding which short-term rental opportunity you would like to explore, there are additional factors that will determine which structure or strategy is the best option for you.
Here are some of the factors you need to keep in mind:
- What state is the property located
- State and Local Laws
- Homestead Exemption Limits and Rules
- Tax implications and status
- Inside and Outside Liability Exposure
- Insurance cost and coverage
- Rental agreements and ancillary documentation
By clearly educating yourself on these factors, you will have a better understanding of the financial benefits of your investment, as well as the tax implications of having a short-term rental.
So, what’s the good news? The good news is that Anderson Business Advisors is ahead of the curve and we have put together a four-part series on the do’s and don’ts of running a short-term rental business, and how to avoid the common pitfalls involved in running them. If you follow our rules you can make the most out of your investment.
For more information about turning your home into a short-term rental property check out my free video series: The 8 Biggest Concerns About Short-Term Property Rentals – https://andersonadvisors.com/the-8-biggest-concerns-about-airbnb/
Tax tips for real estate investors with Toby Mathis, Esq. and Ronnie Withaeger, CPA
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BOSS Business Services, Acorn Corporate Services, and Anderson Law Group unite and form one new company under its new name: Anderson Business Advisors. Please read below to find out the details:
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