Florida vacation rental taxes taxes taxes!

How can $30,000 vacation rental income turn into $0 taxable income…..?

That heading should actually read “taxes” six times over.  Once you start to rent out your property for short term periods of less than 6 months then you are subject to the following taxes (correct as of April 2013, in Polk County, Florida).  Note that this is based on the average person on a Davenport rental – there are some concessions available for military personnel and so on.

1. Sales tax (6%) http://dor.myflorida.com/dor/taxes/sales_tax.html
2. Tourist tax (5%) Link
3. Discretionary sales surtax (1% in Polk) collected as part of the sales tax form
4. Tangible personal property tax (a tax on the value of goods in the rental, but exempt if less than $25k) needs to be filed before April each year – you can do this online at Polk County: https://tangible.polkpa.org
5. Local business tax / occupational tax (a license fee of roughly $60) a yearly one off fee that your management company will normally sort out for you – this means your business is granted the privilege of doing business in Polk County
6. Income tax normally filed yearly: http://www.irs.gov/Filing

Tax tax tax tax tax tax!

Gross income amounts (before expenses) for a 4 bed vacation rental are unlikely to get above $30k, putting the tax bracket firmly in the 15% mark for everything you earn above $9k.  In fact, with your earnings minus the taxes mentioned above, minus additional HOA costs (a future blog instalment), minus running costs, a rental is unlikely to get much above the 10% bracket (the upper threshold of which is $9k profit).

Compared to the UK, there is no tax-free amount in the USA so you start paying tax with the first dollar of profit you earn.

It is safe to assume therefore that you are effectively paying 12% tax on your gross rental income, plus 10% income tax on any profits you make.

A great tax guide from Polk county is here: pdf link. Be sure to read this before you take the plunge into the vacation rental market – not just to get awareness of costs, but to also get an idea of what you need to set up to avoid the tax people chasing you for unpaid taxes.

Real estate tax (similar to council tax in the UK)

On top of this tax, there are 2 additional taxes for everyone in the county, regardless of whether they own a vacation rental or just a single family home:

1. Real estate tax http://www.polktaxes.com/propertytaxes/taxesandassessments.asp
2. Non ad-valorem tax (for services)

Non ad-valorem tax is used for services and not based on the value of your home.  Real estate on the other hand, is.  Real estate tax is based on the millage rate and the value of your home.  More details can be found in the link above.  Roughly speaking a 4 bedroom villa with a pool and spa in Tuscan Ridge will have between $2k and $3K real estate tax and $300 to $500 non ad valorem tax.

License fee

One sneaky late entrant to the game is the license fee – or “state resort dwelling license”.  In 2013 this cost us $360 as a one off set up fee and gives us the right to rent our villa out to the general public.  Annual renewal is around $170 (as of 2019).

http://www.myfloridalicense.com/dbpr/

How do I set up my tax accounts?

Either you can get an accountant to do it all, or a more common method is a hybrid choice of doing some yourself and some via a management company.

Each of the taxes above needs a separate account.  Some but not all have the ability to register and pay online.  The easy ones to set up are the sales tax, the real estate tax, and tangible tax.

Tourist tax needs a pdf form filled in and returned online.  This is paid over the phone via a credit card.

Summary of costs / taxes per year (not including running costs)

In summary a rough idea of the taxes and licensing costs of owning a vacation rental in Florida are as follows:

1. Fixed costs and tax: $3,000 – $4,000
2. Gross tax percentage on all rental income: 12%
3. Tax percentage on net income: 10%

A worked vacation rental tax example

Note that this example is for when you have no personal use of the property.  Once again, complications occur when you use the property with regards to how much of the expense you can offset.  Further complications arise if you use the property for more than 10% of the total days rented, or 14 days (whichever is greater).

When working out your income tax, there are another two very valuable ways of offsetting your profits.  The first is your personal tax-free exemption amount –  for 2013 this is $3,900 but there are non-resident considerations to make if you are married and filing returns jointly (best to check).  The second is in the USA there is a depreciation of the total value of the property (not the land!) over 27.5 years.  So say your rental is worth $110k then every year $4,000 can be counted as depreciation and taken off your profits.  This does have capital gains implications though.

An example:

1. Your villa earns roughly $30,000 gross for a 36 week occupancy @ $120 a night
2. You pay 12% of this to the various taxes listed above: $3,600
3. Your fixed costs and fixed taxes are $4,000
4. Other running costs amount to $14,000
5. Mortgage interest works out at $4,000
6. Depreciation over 27.5 years is $4,000
7. Net profit is $400

This is lower than the threshold exemption amount of $3,900, so no income tax to pay.

Don’t forget that if you are a UK citizen you will need to file an HMRC tax return in the UK too.  However, any tax due will be offset by the tax you paid in the US.  More on this in a future blog post.