IRS Taxes, Permits, and Local Taxes Affect Vacation Rental Investments' Bottom Line

Vacation Rental Taxes

Buying and owning a vacation rental as an investment is becoming a popular option. As it becomes more popular, both local cities and the IRS are catching on. What once was a mom and pop type business is changing. Most vacation rentals are now subject to local hospitality taxes, permits, and other regulations. Some cities, such as New York City, has a law on the books that vacation rentals can operate only as temporary housing –which means a minimum of a 30-day stay. Investor’s Business Daily in an article entitled, Should You Buy Vacation Rental Home Or Skip Red Tape? warns about counting the cost of the taxes and permits in the following article:

Do you dream of buying a piece of paradise, a vacation rental? Beware the bureaucracy.

Short-term rentals — properties that rent nightly, weekly or even seasonally — are often subject to specific usage, nightly tax and permit rules. And these regulations vary from state to state, county to county, town to town and even among property associations.

“I really suggest that buyers thinking about buying a vacation home or condo do their research,” said Margit Tolman, a real estate agent and property manager for ERA Pacific Properties in Maui.

Astute local property managers and real estate agents can help tutor you. But here’s a study guide on vacation rental issues and rules, whether you’re considering a condo that rents for $75 a night, or an East Hampton mansion that rents for $100,000 for the Long Island summer season.

Permits And Taxes

Rule No. 1, most vacation rentals are subject to a nightly tax, sometimes called a bed tax. This can be charged by a state, county or city. Owners must pay the tax, a percentage of their rental fee, monthly, quarterly or annually, per the rules of the taxing body.

In the Lake Tahoe ski and mountain area of Truckee, Calif., vacation rental owners pay a 10% bed tax to the city of Truckee each quarter on any rental of less than 30 days, says Rich Lewis, co-owner of Truckee Mountain Vacation Rentals.

In Hawaii, Maui County vacation rentals (properties rented for less than six months at a time) are subject to nightly tax of 13.42% (4.167% in general excise tax and 9.25% in a transient accommodations tax), Tolman says. The tax payment schedule is set up with the county and can be monthly, quarterly or yearly.

In Florida nightly bed taxes that counties charge run 2% to 5% of rental cost and are

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