Short-Term Rental Insights from an Accountant
Written By Liz Gillian, Accountant at BEC CFO & CPA
Short-term rentals can be a lucrative business venture, but there are some key points to consider before investing in this strategy. There are extra expenses and work as well as more regulations for short-term rentals in comparison to long-term rentals. There are also unique tax considerations for short-term rentals. In this article, we will explore these topics with the hope that if you are considering this strategy, you can move forward with more confidence and knowledge of what to expect.
Rental Income
The nightly rate you can charge for a short-term rental stay is often comparable to a high-end hotel. This can lead to much larger revenues in comparison to a long-term rental. The trick is to keep your rental booked. It’s important to consider location and study comparable rentals in the area. Increased revenue is an enticing prospect, but it doesn’t pan out if your rental has large gaps of tenancy due to seasonal occupancy or a poor location.
Additional Expenses
Short-term rentals come with quite a few additional expenses. In addition to what you might expect when investing in any rental (i.e., property improvements, property taxes, mortgage payments, etc.), you can also expect to invest a fair amount into furniture and appliances, landscaping, supplies for your guests, and utility deposits. You will have larger insurance expenses and ongoing cleaning, maintenance, utility, and supply expenses. Utilizing a property management platform will help to keep your short-term rentals booked, but they also come with their own set of expenses. These platform fees can add up and take a toll on your revenue. It’s important to research and establish a budget for these expenses so they do not catch you unawares.
Local Regulations
Local regulations for short-term rentals still vary by a large degree depending on the location you are considering. Make sure you research local laws and understand the permits and licenses you may need before investing in a property for a short-term rental.
Tax Strategy Considerations
A short-term rental strategy offers the unusual opportunity of recognizing any losses from the activity as ordinary instead of passive, even if you are not qualified as a real estate professional by the IRS. To achieve this, you need to “materially participate” in the activity of the rental. There are several tests to determine material participation, depending on the number of short-term rentals you own, but they are less rigorous than the requirements to qualify as a real estate professional. Obtaining a cost segregation study to capitalize on the current increased depreciation allowances and materially participating in your short-term rental will reduce your income from ordinary activity, potentially saving you money in taxes!
Investing in short-term rentals is a strategy, and just like that word suggests, it takes planning and research. With careful implementation and budgeting there is a lot of income and tax strategy potential to be achieved!
For more information on the requirements to qualify as a real estate professional, stay tuned for our next newsletter!