Short-Term Rental Entrepreneurs- we have some great news for you: The recent GOP Tax legislation has resulted in two tax benefits for your operation, in addition to the laundry list of benefits seen by all types of landlords. The benefits of this new tax legislation are:
- 100% business expensing
- 25 year depreciation on non-residential property
Let’s delve a bit further into how those will affect you.
100% business expensing
As short-term rental entrepreneurs, you should be familiar with the recent Tangible Propery Regulations (TPR), effective since 2014, that allowed for a $2,500 De Minimis Safe Harbor election whereby you could elect to expense all business assets less than $2,500. If you were not familiar with those regulations, take a peek at our client page to see if we might be a good fit to consult with you on these issues.
However, the new tax bill, once signed into law, will allow for 100% bonus depreciation of assets that would not fall under the safe harbor. Going forward, we will still wish to use the De Minimis Safe Harbor to avoid depreciation recapture if the capital assets are ever sold. But if you were not sure about that big renovation that would allow you to charge a higher rate, it might make sense to hold off until President Trump puts pen to legislative paper.
25 Year depreciation on non-residential property
Certain short-term rentals are classified as non-residential real property and subject to a 39-year depreciation schedule. Whether your short-term rental qualifies for 27.5-year or 39-year class life depends on a gross-receipts test to determine if your short-term rental unit was used on a transient basis.
If your short-term rental property did not previously qualify for the 27.5-year class life for residential real property, we have good news! the Senate has proposed, and passed, a change in class life on non-residential buildings going from 39-years to 25 years. In fact, 25 years is now the standard class life for all buildings (residential and commercial), and as a result your tax-free cash flow on all types of real property will be greater.
What are the short-term rental tax benefits that entrepreneurs can take advantage of if your building is already in service? If we wait until President Trump signs the bill, we’ll know for sure. Until then, perhaps it would make sense to hold off on that acquisition you were looking to make before the year end.
As always, I’m going to encourage you to have a conversation with your tax advisor to see how the numbers bear out in your individual situation, and how to factor those into your immediate and future tax situation. If you need a tax advisor or aren’t sure where to begin, feel free to reach out to us and we would be happy to help.
To sum up, we think that the new tax legislation will be good for our clients and landlords on the whole. We have identified two benefits that will bring a tax cut to short-term rental landlords, as the rules for short-term rental landlords are sometimes different than long-term landlords. If you want to know more about optimizing your tax position, please reach out to us to take full advantage of the new tax laws for your business.