4 Tips for Advising Clients on Short-Term Rentals
Short-term renting a home or investment property is becoming incredibly popular and accountants are increasingly asked for guidance from clients getting into this marketplace.
Moreover, savvy accountants are jumping in to help their clients, constantly working to remain up-to-date on tax and licensing requirements and -- more importantly -- what mistakes to avoid.
Short-term vacation rental property management is a growing trend as both a side business and a full-time opportunity, whether your client is simply renting out their own property or managing a portfolio of properties. There are opportunities for your clients to make significant extra income or even make a good living by being their own boss—but most clients need advisory assistance from the first mention of their venture.
As an accountant looking to connect with this growing audience, consider asking all clients if they have plans to rent out their home on a short-term basis. More and more people are renting their homes on a short-term basis, which triggers new and unique tax requirements.
Looking out for these pitfalls can protect your client from both hidden tax liability and operational problems. For any current or prospective clients engaged in property management and real estate services, the risk can be significant.
Here are the top four recommendations to follow when advising clients to make sure they avoid costly mistakes when working with short-term vacation rentals:
1. Listing quality and rental rates
While the vacation rental market is increasingly popular, it’s also increasingly competitive. If your client doesn’t have a quality listing and the correct rental rates, they may not succeed. Your client is competing against hundreds or thousands of other properties in their area via searches from travelers on large vacation rental websites, such as Airbnb and HomeAway.
It is imperative to have high quality and plentiful photos, good descriptions of the property location and amenities and a hospitable attitude. If you don’t have quality pictures or travelers don’t understand your location, they will skip over the listing.
Also, if the property isn’t priced correctly your client may not get the bookings they had hoped—resulting in potential earnings being left on the table. Rental rates can have broad fluctuations based on seasonality and property attributes.
It is important for your client to research the market and understand the pricing of similar properties. Short-term rental pricing varies primarily based on size, location and quality. A beachfront property can rent for a significant premium compared to one block off the beach.
Counsel your clients to be thorough and realistic about the strengths and weaknesses of their property. Create a yearly calendar and set rates based on market research. Also, look for events that may create a spike in demand, such as concerts, football games, conventions, college graduations and festivals; basically, anything that brings extra visitors to the area.
Don’t miss out on potential revenue by neglecting to price in the demand resulting from local or regional events. Appropriate pricing and timely local events can often serve as an excellent opportunity for your clients to drive extra income for the year.
2. Hotel occupancy taxes
Any time a property is rented short-term, which is often considered anything less than 30 days, hotel occupancy tax must be collected on the transaction. Unfortunately, property owners and property managers are often unaware of lodging tax requirements.
Lodging taxes are completely separate from income taxes and need to be collected and remitted monthly and quarterly, throughout the year. Also, lodging tax rates are high, typically 10 percent to 15 percent of the gross rental transaction. If your client is not correctly collecting and remitting these taxes, significant liability can build up quickly.
Lodging tax varies by city, county and state, so the rate to charge and tax agency involved is complicated. Most vacation rentals also have registration and licensing requirements that need to be completed to operate legally. It is critical in the current environment that, as an accountant specializing in short-term property management and vacation rentals, you are aware of the different regulations and tax requirements.
3. Get organized and find the right tools
Short-term renting, even when it’s just one property, is like running a small business. In addition to advertising and pricing the rental property that we discussed above, there are additional tasks that will need to be properly managed.
These tasks include:
- collecting funds (travelers prefer to pay with credit cards)
- damage deposits or insurance
- cleaning services, maintenance
- rental agreements
- licensing and taxes
- guest directions
- guest check-in and accounting and recordkeeping
In addition, guest reservations may be scattered across several platforms, such as Airbnb and HomeAway. An owner who isn’t properly set up and organized to manage these various activities will be scrambling to stay on top of their rental business.
The major short-term rental platforms have increasingly taken on the role of managing some of these tasks, such as money collection, rental agreements and guest interaction—and may have partners that offer solutions to assist with other functions. If your client is managing a portfolio of properties, we strongly recommend property management software (PMS), which will manage nearly all of these tasks.
One particular pain point for both owners and accountants is correctly managing occupancy taxes and licensing. For an individual with one property, most people are using a combination of QuickBooks or other accounting software and a spreadsheet. Because the market is thriving, there are many new companies offering solutions to some of these problems, so you or your client should be open to exploring new tools.
4. Administrative risk around taxes and regulations
In our business, we constantly see customers who fail to understand the tax and licensing implications of short-term renting. We also regularly take on new customers who were aware they had to collect and remit occupancy taxes, but didn’t know how to go about registering and filing the taxes.
Then there are other clients who register, but didn’t understand they had to remit a tax report each month, or who remitted the city tax report but not the state filing. For a property manager any missteps on the tax and licensing front can create significant friction with their property owner clients.
We routinely see property owners leaving property managers because the occupancy taxes were not being managed correctly, which creates direct liability for the owner’s property. There are a number of complicated moving parts to be tax and license compliant when short-term renting.
The average property owner is simply not aware and has never dealt with these requirements. Unfortunately we commonly see advisors, such as accountants and lawyers, miss these requirements, too.
Keep these four tips in mind when working with your clients engaged in the short-term rental market and you will be the hero with timely guidance who helps prevent costly mistakes down the line.