Question: What would you say is the latest craze in real estate investing? The thing that everyone is talking about and wanting to learn more about?
If you ask me, the term “short-term rentals” comes to mind. At the most recent BPCon, the short-term rental breakout session was not just a full house. It was standing room only. People were packed wall to wall, even with investors standing outside the conference room listening in.
So why are so many people interested in short-term rentals? Well, odds are that even if you do not own a short-term rental, you have likely stayed at one before. Whether listed through Airbnb, VRBO, or other similar sites, many investors see significantly higher cash flow by turning a traditional property into a short-term rental. Also, there can be an added perk if the investor can get some personal enjoyment out of the short-term rental property as well.
It is not uncommon for us to see a property make two to three times the cash flow when changing from a long-term rental to a short-term rental. With the higher cash flow comes the need for good tax planning. Why? Because how much of it you get to keep is more important than how much money you make! So let’s go over how to minimize taxes from your short-term rental investments.
Short-term rentals and taxes
To start, we need to first define what a short-term rental is when it comes to taxes. Many investors are under the impression that just because they list their properties on a platform like VRBO or Airbnb, they are considered short-term rentals. That is a mistake.
For tax purposes, a rental is not defined by where it is listed but by the number of days that a property is available for rent, as well as what type of services are offered alongside the rental. Generally speaking, if the average number of rental days per guest is seven days or less for the year, then the property is considered a short-term rental for tax purposes.
If the average guest stay is longer…