6.4 Accountant Alliance

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in place for their company, if that’s the way they want it. If they want to put it in a trust, then the trust should be set up in advance. Sometimes there are restrictions on how you can take title, which is another thing that would show up in the declaration.

“The next thing they have to understand is, are they going to pay cash, or are they going to get fi nancing? If they pay cash, then they can usually take title however they want. If they’re going to get fi nancing, it’s a little trickier because various lenders have various requirements about how you take title. Some lenders will not allow you to take title in a corporation or LLC. They’ll only allow you to take title as an individual or perhaps in a trust.”

Jason advises VRP buyers to stay in communication with the title agent ahead of closing. Respond to requests for documents or ID in a timely manner. If you’re going to be in a diff erent state and hope to do the closing remotely, communicating that is very important. It’s helpful if all questions are asked and answered before you get to the closing table.

Finally, it’s important that buyers request a full copy package of all of the executed documents at closing. “I know that sounds elementary,” he says, “but I can’t tell you how many times people have to come to me and said, ‘Oh, I didn’t get a copy of my documents.’ Some people assume they’re going to get it, and then they don’t and time passes. The list would be, in order of importance, the deed, the warranty deed, your settlement statement, your title policy, any affi davits that were executed at closing, any agreements that were executed at closing, a copy of your land survey of the property. All of these things are very important to have, for documenting their fi le should they want to do some refi nancing in the future or for when they want to sell.”

6.4 Accountant Alliance

Running your VRP business, particularly if you are a Do-ItYourself operator instead of utilizing a third-party Vacation Rental

WEALTH AS A VACATION

Management company, will take an enormous amount of your time. Adding the burden of proper accounting procedures is not only diffi cult, it can be downright negligent.

All good businesses have a Chief Financial Offi cer, a CFO. This individual at the top of the corporate food chain directly oversees all things fi nancial in the company. You would be doing your own VRP company a disservice if you did not enlist an accountant with specifi c disciplines in the real estate tax and short-term rental fi elds. In this section, I will review just a few of the elements that you need to understand regarding this aspect of your business. Even armed with this information, you should defi nitely bring in the expertise of an experienced accountant as a key member of your VRB team.

Short-term online rental marketplaces have made it easy for homeowners and property managers to market their rental property, yet experienced VRP owners know that in order to succeed, they need to treat their short-term rental or rentals like a business. The IRS, in fact, insists that they do so.

Fortunately, you also get business deductions when income tax time comes. VRP operators are allowed to deduct expenses related to their business. There are many deduction opportunities for your vacation rental business, but they might not all be obvious. Do a little research and work with an accountant to make sure you aren’t missing out on the deductions you could claim. VRP owners should especially pay attention to new Tax Cuts and Jobs Act deductions, most of which became available starting with the 2018 tax year.

Income Taxes vs. Lodging Taxes VRP business expense deductions relate to federal income tax. It’s important to understand the diff erence between income tax, which you pay to the government based on your income, versus lodging taxes. The lodging tax is a tax your guests pay on the cost of renting short-term accommodations from you. You, the VRP owner, don’t actually pay lodging taxes. However, you are responsible for

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collecting the tax and passing it on to the appropriate state and local tax authorities.50

The 14-Day Rule Your VRP must be classifi ed as a full-time rental business to maximize your tax deductions. That means it’s used by you for your personal stays for less than 14 days or fewer, or 10 percent or less of total annual rental days, whichever is greater. Days spent repairing or maintaining the property don’t count toward personal use days.

You’re only allowed to make deductions in proportion to the amount of time the property is being rented by guests if you use your VRP for personal use for more than 14 days a year. If your VRP is a full-time rental business, you may be able to deduct up to $25,000 in losses each year, depending on your income.51

VRP Tax Deductions Here are some key tax deductions that are easy for new VRP owners to miss:

1. There is a new pass-through business tax deduction. Under the new Tax Cuts and Jobs Act that went into eff ect January 1, 2018, landlords (including VRP owners) who own their rental property through “pass-through” entities including sole proprietorships, limited liability companies, or partnerships may be eligible to deduct an amount equal to 20 percent of their net rental income. This is a personal deduction that can be taken even if you don’t itemize.

2. There is a new deduction for major improvements. Changes to Section 179 of the tax code now allow VRP owners to write

50. https://www.avalara.com/mylodgetax/en/blog/2018/03/10-easily-overlooked-taxdeductions-airbnb-hosts-can-claim.html Accessed June 10, 2019. 51. https://www.thestreet.com/personal-fi nance/taxes/how-is-rental-income-taxed-14816849 Accessed June 10, 2019.

WEALTH AS A VACATION

off the costs of certain personal property used in a business. For example, some vacation rental operators can write off the cost of fi re systems, security systems, roofs, and HVACs. The amount that can be deducted for personal property under Section 179 was raised to $1 million starting in 2018. This rule is applicable only to property used for rental more than 50 percent of the time.

3. Check the new bonus depreciation deduction. Under the old tax law, business owners could only deduct 50 percent of the cost of personal property used for the business each year. Now it is 100 percent. This means you can deduct the full cost of property such as appliances and furniture all in one year.

4. Mortgage interest: You used to be able to take a deduction on interest on up to $1 million in newly acquired debt; the new law changes that amount to $750,000. However, these limits do not apply to rental businesses. You can deduct all mortgage interest on VRP as a business expense.

5. Credit card and loan interest. If you use credit cards or personal loans to pay for VRP business expenses, you can deduct the cost of interest payments on those accounts.

6. Property taxes. The Tax Cuts and Jobs Act also lowered the amount that can be taken as a personal deduction for property taxes to $10,000; however, the limit does not apply to properties operated as rental businesses. VRP owners can take the full amount of property taxes paid each year as business deductions.

7. Insurance. You can deduct the cost of any insurance that covers your VRP as well as for private mortgage insurance premiums on rental property for the year they were paid.

8. DIY rental marketplace fees. Online listing sites connecting vacation renters and VRP owners generally charge a “host service