New Federal tax bill and the second home market

11 Replies

Greetings BPers,  I'm curious to hear opinions from those of you in vacation markets on the effects of the new tax bill on the second home market for 2018. My gut tells me that retail buyers will hesitate and put downward pressure on the sales market. Attached Denver Post Article speculates more  inventory will crowd the rental markets as more second home owners convert to rental owners.

https://www.denverpost.com/2017/11/10/wealthy-homebuyers-gaming-gop-tax-plan/

If your second home vacation rental is on schedule E as I've been told it should be then everything is still deductible as before.

Plus there is the 20% deduction from business income in addition.

I just listened to a Tax attorney on a 2 hour call yesterday and the tax reform is a great thing for real Estate investors.

@John Underwood and @Chris Martin . Points taken. My question was more toward market psychology. I agree, tax bill is a win for investors. However, vacation markets(at least mine) are dominated by retail buyers not investors. If the masses hesitate and delay purchase of that dream getaway I would think it may put some temporary downward pressure on sales and create some buying opportunity.

@John Underwood @William Leahy the tax reform can be a good thing for RE investors if you don't operate in high tax rate states like myself in CA, due to SALT. :) My accountant has already warned me that I will be taking hits with the current rules unfortunately due to the $10k SALT limitation.  

As for your market psychology question, I like where you are going with that! The only problem is more rental inventory, especially at lower rates will likely only fuel further permitting regulations and moratoriums which could cause a brief rush of buyers to try and grandfather in.  The good news is if permitting regulations controls the supply of available rentals it should help keep the demand and pricing stabilized hopefully. 

Great thoughts and questions! 

@John Underwood I’m not Brandon Hall but your vacation rental income is Schedule C unless you have a 7 night minimum (or more than 7 night average stay for the year). Or so I’ve been told 20 times.

@Lucas Carl I have been pulled back and forth on this until I read an article by an attorney.

If you are providing a bead and breakfast with daily maid service meals etc then yes this is schedule C. If you are renting your entire house and not providing daily services then it is schedule E. I got this from an attorney that I trust.

Also the IRS has this to say about it:

Here are some tips from the IRS about vacation rentals.

You usually report rental income and deductible rental expenses on Schedule E, Supplemental Income and Loss.

https://www.irs.gov/newsroom/renting-your-vacation...

@Lucas Carl

I found the attorney's article that opened my eyes:

The question then becomes whether the income is considered passive rental income (to be reported on Schedule E) or active business income (to be reported on Schedule C). The answer depends on whether you provide “Substantial Services” to your guests – in addition to a nice place to stay. When you provide Substantial Services to your guests, then the income you make needs to be reported on a Schedule C, and is subject to self-employment taxes. Examples of services that would be considered “substantial” are:

  1. Cleaning of the rental each day while the property is occupied by the same guests.
  2. Changing bed sheets and other linens each day while the property is occupied by the same guests.
  3. Concierge services.
  4. Conducting guest tours and outings.
  5. Providing meals and entertainment (like providing breakfast each morning).
  6. Providing transportation.
  7. Providing other “hotel-like” services.

At the end of the day, the more you look like a hotel or “true” bed & breakfast, the better the chance that you will need to report your income from the rental on a Schedule C, and pay self-employment taxes on that income.

https://markjkohler.com/how-a-short-term-vacation-...

@John Underwood I’ve heard from many CPAs including Brandon Hall that under 7 days takes precedence over maid service/entire house etc.
I guess this leads me to the question.... what are the benefits of E vs C and C vs E?

@Lucas Carl Not sure pros and cons of E vs C, but one thing I noticed was:

At the end of the day, the more you look like a hotel or “true” bed & breakfast, the better the chance that you will need to report your income from the rental on a Schedule C, and pay self-employment taxes on that income.

Sounds like you might be subject to more taxes with Schedule C.

I personally would trust the IRS statement (see above) and an attorney over what 50 CPA's were saying.

@John Underwood Here's an interesting article about claiming under 7 day rentals on schedule C but not paying self employment tax if you don't provide services. 

Everyone seems to have a different answer to this question. 

click here

@Lucas Carl I appreciate the article. I am always open to learning something new and find out what I may be doing wrong so I can correct it.

This person is a CPA and he keeps saying BNB which you know is a Bed and Breakfast. I do agree that a BNB should be on Schedule C.

However the IRS says for a vacation rental "You usually report rental income and deductible rental expenses on Schedule E, Supplemental Income and Loss." Link is above to the article.

Also the Attorney that I listed above and provided a link to says that passive vacation rental should be on schedule E, but BNB income where services are being provided should be on schedule C.

So I agree with the article you sent because he keeps mentioning a Bed and Breakfast not a VRBO or STR.

I am providing a lock box with keys and never even meet my renters usually and am not providing any daily BNB services so I am convinced for now that schedule E is the correct way to go.

I would question any CPA that tries to say the IRS's guidance is wrong.

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