Financial Planning Focus – Vacation Rental’s Hidden Tax Burdens

March 21, 2016
By Dana G. Sippel, CFP®, CPA/PFS

It is tax time of the year again and you are compiling volumes of data for your accountant to prepare your annual income tax returns. You have spent hours reviewing checkbooks, credit card charges and cash receipts to be certain that your CPA has all the facts to minimize your tax liabilities. You hand over the package to your CPA and figure that they will determine all the taxes that you need to legally pay, right? Not so fast if you own a vacation rental home.

Many clients have purchased second homes so that they can enjoy time at their favorite beach, ski resort or mountain retreat. To help offset the ownership costs of these retreats, some clients decide to collect rent from friends, family and other favored guests. Once you have embarked upon this path, you will need to make certain that you have paid all the tax obligations for your vacation retreat. Relying on your accountant to take care of all the tax-related items associated with your vacation rental property may not be a safe bet.

Vacation rental homes are subject to an assortment of taxes, licenses and fees that are not part of your federal and state income tax filings. These taxes are known by many names such as occupancy tax, room tax, lodging tax, hotel tax, bed tax and others. There may also be annual registration requirements with the state, city, county or other tax jurisdictions. Of course, the registrations with various agencies carry their own fees. Sales taxes alone can run from 5 – 15% of total gross amounts collected from tenants, including base rent, cleaning fees, extra guest charges, pet fees and other miscellaneous charges. These taxes are your obligation to the tax authorities even if you do not collect the amounts from your guests.

Tax and agency personnel are stepping up their enforcement efforts as local jurisdictions look for ways to close budget funding gaps. They are finding their work increasingly easy as they simply search websites such as VRBO, HomeAway, Airbnb and Flipkey to locate rental properties. Once they find a target property, a simple cross-check to their database determines whether taxes and fees are being paid. Back taxes can add up quickly and become a huge burden if ignored over a long period of time. In addition to back taxes, local tax authorities likely have the ability to assess interest and penalties that can quickly escalate to very large sums. The tax authorities can also file liens against your property to collect these back taxes and fees.

So what should you do if you have a vacation rental and are not certain that you have been meeting all of your local tax and fee obligations? You have 3 options to get ahead of this issue:

  • Take your time to research all the taxes, fees and other charges;
  • Hire an accountant to help you (could be expensive); or
  • Use a specialized third-party service (usually reasonably cost effective).

Once you have determined all of your obligations, file and pay all your taxes and fees moving forward. At this point, you will be better situated to address any previously overlooked taxes and fees.

Vacation rental homes can be a beautiful way to relax, enjoy your favorite retreat spot and create wonderful family memories. Make certain that your vacation rental property does not become a tax nightmare. Comply with all the local tax laws.