Beware of Men In Black!

This is a blog post I wish I didn't have to write.  I don't like to talk about things that are unpleasant.  However, the harsh reality is that there is a day of reckoning coming for many unwitting vacation rental property owners that could have dire consequences.

I have been reading with increasing frequency about tax jurisdictions cracking down on short-term rentals — and I'm not even talking about the ongoing contentious debate around whether short-term rentals should be allowed at all in certain areas.  While that certainly is a critical issue as well, I'm talking about tax authorities ramping up their efforts to make sure that they're getting all of the lodging tax revenue they should from the exploding sharing economy.  And they're getting very crafty.

In several jurisdictions around the country, they'll simply search the Airbnb, VRBO, or HomeAway websites for properties in their town or city.  Then, they'll go to their records to see if there's a license or permit for that property and if they've been receiving attendant lodging tax returns and payments.  If there's no permit, no tax payments, or neither, the Men In Black come calling in an unmarked sedan.  Ok, maybe not in person, but you can be sure that at least a threatening and demanding letter is on its way in the mail.

We're hearing more and more stories from tax jurisdictions — told with great gusto and pride — about how they're tracking down these property owners and recouping large amounts of back taxes as well as penalties and interest, much to the great surprise and dismay to the property owner.

In the vast majority of these cases, there was no criminal activity intended on the part of the owner — they simply didn't know their lodging tax obligations or were misinformed.

         "I rent my property less than two week a year so I'm exempt."

         "I don't operate a hotel so lodging taxes don't apply to me."

         "I report my rental earnings on my income tax so I take care of them that way."

These are just a few of the common excuses we hear that are completely wrong.

The most frustrating thing for us is that the difficult time that these property owners now face is completely and easily preventable.  Property owners aren't even the ones technically paying lodging tax — their guests are.  The property owner is just a pass-through entity collecting the tax from the renter and then remitting the tax to the appropriate tax authorities.  There is no lodging tax out of pocket for the property owner!

That is the primary difference between lodging tax and personal income tax.  Lodging tax is a tax on the transaction regardless of how many nights you rent per year.  And yes, for all intents and purposes, you actually are operating a hotel in the eyes of the tax authorities.

Here at MyLodgeTax, we are dedicated to preventing these surprises and "gotchas."  Don't be a victim of these intensifying crack-downs.  With our simple solution, you can rest as comfortably as your guests knowing that you're 100% tax compliant with your vacation rental property.

4 Vacation Rental Tax Mistakes Almost Everyone Makes

Lodging taxes are full of "gotchas."  In our guest blog post for our good friends at Evolve Vacation Rental Network, we outline some of the most common pitfalls we've seen in our 13+ years of experience ensuring that our customers are compliant with their lodging taxes.  Don't let one of these mistakes catch you off guard!

The IRS launches Sharing Economy Tax Center, but it won’t help you with lodging tax

This week, the IRS unveiled its new Sharing Economy Tax Center to help active participants in the sharing economy navigate the many income tax considerations associated with common income-earning activities such as driving for Uber or renting out a room on Airbnb.  Unsurprisingly, the IRS content focuses on Issues for Individuals Performing Services – like a car shuttle service or short-term property rental.  But consider the source.  Remember, this is the IRS whose chief concern is how you report revenue from these activities and file your individual income tax returns.  They are focused exclusively on your income and collecting the proper taxes on that amount at the federal level.

But lodging tax has nothing to do with the IRS.  If you’re looking for lodging tax help on the new IRS website, you’re likely to be frustrated.  Although the site does provide useful information for vacation rental property owners about depreciation, amortization, as well as what expenses you can deduct (such as mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance) – issues which will affect your annual taxable rental income – it does not provide any lodging tax compliance guidance whatsoever.

This is due to lodging tax being levied by the city, county, and at the highest level, state tax authorities – not at the federal level.  So while the IRS site may help you understand how to reflect personal earnings from your property rentals on your individual income tax return, it isn’t going to help with lodging taxes.  Which is where we come in.  Lodging tax is a particularly tricky tax because there are multiple entities involved – usually the city, county, and state.  And it’s typically up to the vacation rental property owners themselves to figure out their lodging tax obligations to each tax authority governing their property’s location.  If that doesn’t sound like much fun to you – hint, it isn’t – we can help.  We’ll take care of everything and automate your lodging taxes for you.  And we won’t ever refer you to an IRS Tax Center site – we promise!

How Does MyLodgeTax Work?

We know how we do what we do, but do you?  Lodging taxes can be a confusing subject – sometimes explaining them and how we automate your lodging tax compliance can be difficult.  In this short & fun animated video, we cut to the chase regarding what lodging taxes are, how they affect vacation and short-term rental property owners, and what we do to automate the whole lodging tax compliance process.  All you do is report your rental revenue and we do the rest.  Watch and learn!

Lodging tax timing trauma - an example

Ok, so you know about lodging taxes and are confident you can tackle them yourself.  You’ve prepared your own income tax return in the past – how hard can this be?  Well, for starters, for most people, filing an income tax return is a once-a-year chore.  You do it once and then forget it until next April rolls around.  And you usually file both your federal and state return at once.  By contrast, the timing of lodging tax return filings & payment is typically monthly or quarterly – and possibly semi-annually or annually, too.  Plus, you’re likely dealing with at least three different tax authorities – city, county, and state – requiring three different (and separate) returns.

Let’s look at a quick example.

Guest:                                    Randy Renter

Nightly rate:                                       $200

Number of nights:                                  x 5
Total rental revenues:                      $1,000
Mandatory cleaning fee:                        $50

Total taxable revenues:                    $1,050

City tax rate:              4.2%

County tax rate:          3.5%

State tax rate:             2.1%

Total tax rate:             9.8%

Taxes charged:                                   $102.90

Total fees charged Randy:                $1,152.90

Although you are required to collect the $102.90 in taxes from Randy, it is not your money.  You are a “pass through” entity between your guest, Randy, who is paying the tax, and the taxing authorities.  However, it is you who are responsible for collecting the tax and remitting it to the city, county, and state tax authorities.

Back to our example.  The amount due to the individual tax authorities is:

Taxes due

City (4.2%):                   $44.10

County (3.5%):               $36.75

State (2.1%):                  $22.05

Total:                           $102.90

Filing frequency

City:         Monthly

County:   Quarterly

State:       Annually

In this example, you would have to file, at a minimum, a monthly return of $44.10 to the city.  If it’s not the end of a calendar quarter, you would have to hold on to the $36.75 in tax to the county until it’s time to file your quarterly return.  Similarly, you would have to retain the $22.05 owed to the state until the annual return is due.  If it’s the end of the year, you’d have to file all three separate returns to the city, county, and state.  Oh, and those months you don’t rent?  You’re still responsible for filing a return for $0 to the city.  Yep.  Can’t make this stuff up!

By now, you should be starting to get a sense for how the complexity of lodging tax compliance can quickly increase – especially if you have multiple properties.  Our guess is that you’d rather not have to deal with lodging taxes so that you can focus on other things – like renting your property and keeping guests happy.  But that’s just a hunch!  If you’d like to simplify your life, leave the taxes to us.

Zen and lodging taxes

“Be the tax, Danny.”

Lodging taxes get a bad rap.  The topic of “taxes” generally makes people squirm and conjures up ominous images of black-suited tax agents.  When someone purchases a vacation rental property, the concept of taxes is frequently far from their minds.  As lodging taxes face increasing scrutiny in the vacation rental industry, it’s easy to view this process with contempt.  However, if you can put aside for a moment any negative preconceptions you may have regarding lodging taxes, you may find that there are many possible reasons to view taxes in a more positive light – especially if your rental is located in a popular travel destination.

“Tax on, tax off.”

I can probably guess what you’re thinking.  “Lodging taxes are a pain, pure and simple.  What good are they?”  Well, here are just a few ways that may help you look at lodging taxes in a different way and how you may actually benefit from them:

·   You don’t pay sales & lodging taxes out of pocket:  Sales & lodging taxes are paid by your guests, not you.  You’re responsible for collecting the taxes and filing the returns, but you guests are the ones actually paying the tax.

·   Taxes help your town’s infrastructure:  If your property is in a popular tourist area, the majority of your community’s revenue likely comes from travel and tourism-related taxes.  A good chunk of those tax dollars are commonly reinvested in improving your town’s infrastructure to keep your community attractive and attract future visitors.

·   Taxes legitimize the vacation rental industry:  There are some hotels that would love to see less competition in the lodging space.  Certain companies have led a charge on banning the vacation rental industry on the grounds that owners aren't collecting taxes from their guests.  By embracing taxes, we can ensure that vacation rentals (and their owners) continue to thrive for many, many years to come.

So you see, taxes aren’t all bad.  The return filing process may be tedious, but by collecting and remitting lodging taxes, you actually benefit in the long run.  If you accept them – no, embrace them! – you will see the benefit.  But in the off chance you still don’t want to deal with the hassle, we can help.

Namaste.

Two great (free!) resources for vacation rental property owners - both new and experienced

Congratulations on owning a second home or vacation property!  And congratulations too for being an astute business persons and looking into the benefits of offering your home as a short-term vacation rental.  Whether you are just getting started or are already actively listing your property on popular vacation rental platforms like Airbnb, HomeAway, VRBO, or FlipKey, there are always new tips and tricks to learn.

Our friends at HomeAway and EvolveVacation Rental Network have put together two handy guides (free!) with a ton of useful information – especially if you’re just getting started.  But even if you consider yourself a vacation rental expert, there could be something you missed and it’s worth perusing these guides.  They’re relatively short reads yet chock full of great insights and advice.  Don’t take the chance that you could miss a quick suggestion or delighter to turn your guests’ experience from “meh” to “wow!”

The first from HomeAway is a step-by-step guide to renting you vacation property.  It’s a primer to make sure you’re ready to start accepting guests and every step necessary to get you to that point.  HomeAway’s Renting Your Vacation Home:  a step-by-step guide is a resource you’ll want to keep handy.

Evolve’s Ultimate Vacation Rental Success Guide is a bit meatier and will help you really optimize your vacation rental property listing and business.  This tutorial is more in-depth and detailed and can be viewed as a “how to” – how to step up from the basics of home renting and move confidently into the big leagues.  The only cost is an email address!  And be sure to study page 8 in Legal & Tax Preparation for some sound advice about lodging tax compliance (hint, hint)!