2.6 Business Set-up and Taxation

Business Set-Up

Business licenses are required in many states and cities in order to operate a short-term rental.

The most common business entity setup options are LLC, LLP, S-Corp, C-Corp, LP, and Trusts.

If you are located in a popular international market, you may also get investors looking to purchase for the EB-5 visa program. The main thing to know would be the minimum purchase requirement is $500,000 USD. (these figures change frequently so make sure you check on current regulations)

Anyone receiving income from a rental property must file and declare assets, income and expenses.

Taxes

Every state and local municipality or town will have taxes that are based on a % of the stay.  Usually, these are paid by guests and collected and remitted by the owner.   These are paid on each booking and are usually filed monthly. You may hear this called different things in different states such as lodging tax, hotel tax, bed tax, tourist tax, etc.

In some states Airbnb & Homeaway/VRBO will collect lodging taxes directly from the guests and pass them to the IRS, however, this is not consistent and they may not collect all the required taxes.  Refer investors to Avalara MyLodge Tax for up-to-date information on requirements in your area.

Property Related Taxes

There are multiple taxes related to property purchase and rental and you should have a basic grasp of these.

•  Capital Gains Tax is a US federal tax that is payable on the net gain of the property to the IRS.
• The 1031 Exchange allows US citizens to defer paying the capital gains taxes by moving their gains into another property investment.
• When selling be aware of FIRPTA.  This is a 15% withholding for the IRS on all investment properties sold by foreign owners. You must make sure this is withheld at closing. Your buyer will be at risk owing to the IRS if not.

The tax ID number (EIN, SSN) is how the IRS identifies individuals for tax purposes. Your US citizens will have an SSN (social security number) at the very least but may still need to get an EIN. An EIN is like an SSN for business.

The ITIN number is for those not eligible for an SSN. They will need to register for an ITIN for tax reporting purposes in order to legally operate their short-term rental property.

Since the vacation rental is a business the owner will also have to pay annually the tangible personal property tax which is an ad valorem tax assessed against the furniture, fixtures, and equipment located in businesses and rental property.

Do not try to advise your clients on taxation and business issues.  Refer to the right accountant or business advisor and focus on what you do best.