Tax Implications of Short-Term Rentals for Property Owners
Short-term rentals like Airbnb are becoming increasingly popular. We get a huge number of inquiries about them at my real estate law office in Edmonton, Alberta, and I know that folks are concerned about them across Canada. The legal issues with short-term rentals often have to do with local zoning regulations for a property, which can vary by city and even by neighbourhood. The tax implications of Airbnb (or its competitors like Vrbo, HomeAway, TurnKey, FlipKey, etc.), however, are mostly provincial and national. This blog post will flag some of the key considerations and link to further reading from accountants who specialize in real estate investment.
What kind of income are you making and how will it be taxed? What if you have a combination of short-term and long-term, does this make a difference? What if you’ve purchased the property by way of Agreement for Sale and you plan to turn it out on a Rent-to-Own to someone who is doing short-term rentals? There are certainly a lot of questions. Make sure you start thinking through them—especially if you’re planning to attend our upcoming AFS (Agreement for Sale) Intensive workshop coming up September 14, 2019 in lovely Red Deer, Alberta.
Airbnb Tax Classification and Reporting
The first tax considerations with short-term rentals like Airbnb is how much money you’re making and how you’re making it. For people looking to rent a spare room occasionally for extra cash, it can be relatively simple. No matter what, you’ll need to declare the gross income and expenses on your tax return. If you’re making less than $30,000 Canadian per year with short-term rentals, you don’t need to charge sales tax (GST/HST). If you only provide a furnished space to guests, the income is declared as rental income on your tax return.
Things with tax are not always as simple as they seem. If you provide additional services to guests, like breakfast, laundry, guided tours, etc. then the income could be considered a business, and it is declared—and taxed—differently. Furthermore, if you do short-term rentals most of the time, your property may no longer be considered a residential complex for tax purposes. In some provinces or cities, there may also be additional accommodation taxes or levies on short-term rentals. As always, be sure to do your due diligence.
Tax Deductions and Property Status
When reporting expenses to reduce the tax burden, short-term rental hosts must distinguish between two types of deductions. First are current expenses, which are regularly re-occurring costs like mortgage, utilities, insurance, and repairs. The expenses can be prorated against the amount of time that a property was rented out, as well as the amount of the space that was rented (i.e., one room vs. a whole house).
Second are capital expenses, which are more durable, such as renovations and improvements to the building. There is a limited capital expense allowance in any given year, but the costs can be deducted over several years.
N.B. Claiming capital expenses can change the tax status of your property!
When you sell a property that is your primary residence or a long-term rental, it is typically exempt from the GST/HST. On the other hand, property that is mostly used for short-term rentals is subject to GST/HST when you sell. Also, if you claim capital expenses on your home or rental property to offset short-term rental income, it can prevent you from claiming the principle residence GST/HST exemption when selling. The Canada Revenue Agency won’t let you just change the status back to being a principle residence or long-term rental before selling; if you do that, you as the owner will be liable for GST/HST on the market value!
Dig Deeper on Tax for Short-Term Rentals
This blog post has introduced some of the important issues of tax for Airbnb and other short-term rentals in Canada. Tax law is complicated, and it’s important to do your due diligence if you want to become a host or if your Rent-to-Own tenant/buyer is planning on hosting. We are happy to link everyone to our friends at BDO Canada who have written a more in-depth article and a helpful FAQ on the subject.
One last bit of advice. Keep records about all your income and expenses for short-term rentals, as well as details about number of guests, length of stay, services provided, etc. If the tax collector comes knocking, you’ll want to be prepared to answer all their questions! You may wish to consult an accountant early to avoid hassles down the road.