How is VT STR income tax calculated?

Question

I’m looking for some help understanding how my income from a VT STR is going to be calculated. I’m anticipating a 30k gross and 10k net income after expenses. Does the gross or net income get taxed? Since I’m only MAKING the 10k after mortgage, property tax, etc I’d assume only the 12k would be taxed but I want to make sure. Anyone more familiar with how this works?

Aaron Villery · Answer

While it has been mentioned, the depreciation on the property will be one of your largest expenses. Some call this a phantom expense because it doesn't come out of your pocket but you can deduct it anyway. You can calculate it against the price of your building (not land) divided by 27.5 years. I suspect that you won't end up with much of a profit on paper after applying all of your deductions.

I am not a tax expert though.

Mark H. Porter · Answer

Anna, don’t think of the income as anything special, it’s just income like any other.

Like any investments, the costs involved in delivering that investment can be deducted from that income.  Don’t worry about what state or whether it’s LTR or STR, you just need to know what business expenses can be deducted from the income to calculate the taxable income (mortgage interest, depreciation, HOA fees, utilities, property taxes, etc..).  Unless you do your own taxes your tax person will sort this all out.

Greg O'Brien · Answer

@Anna Batchelor your mortgage interest, not your total mortgage payment

Anna Batchelor · Answer

@Ashish Acharya

Wow you’re a LIFE and wallet saver!

So if taxed on the net then it’s only What I’m bringing home AFTER my mortgage and prop taxes, etc.

Thank you so so much. Really glad I came to this forum instead of listening to my (non property investment familiar) accountant !!

Ashish Acharya · Answer

You are taxed at the net. Mortgage principal payment is not deducted. Also, you are missing out on depreciation deduction.

You can deduct expenses that meet these two criteria:

1. Ordinary Course of Business

2. Necessary in the course of business

These are the basic ones:

• Mortgage Interest

• HOA fees

• Taxes

• Insurance

• Depreciation

• Repairs

• Management fees

Here is the list of some of the items:

1. Payment to kids if they maintain your property.

2. Mileage: any mileage that is associated with the rental activity. Use apps like MileIQ to keep track of it. Note: If you go to the same meeting each month, you can do detail tracking for a month, and can use the same detail to estimate expenses for the rest of the year. (If nothing changed).

3. If you don't want to use mileage, you can deduct actual auto expenses. If you use your Car: This can include- oil changes, maintenance, gas, repairs, parking, tolls, and depreciation. If you use a personal car, ensure to keep a detailed record so that CPA can prorate the expenses between personal and business. These expenses can include- oil changes, maintenance, gas, repairs, parking, tolls, and depreciation. If you use a personal car, ensure to keep a detailed record so that CPA can prorate the expenses between personal and business. Or you can take a mileage deduction instead of the actual cost.

4. Travel cost if your property is in another state.

5. Meals when traveling away from home - 50% (100% in 2021) is deductible unless the meal is provided to the general public (like Open houses) then it is 100% deductible. Open House expenses can include meals and entertainment (Balloons).

6. Expenses incurred while meeting with investors.

7. Expenses incurred while meeting with realtors.

8. Going to investors' meetings. Mileage and meals

9. Money paid for RE tax books is also the tax deduction.

10. Marketing expense and advertising.

11. Cleaning and maintenance.

12. Commission (Expenses like commission, abstract fees, and recording fees to obtain your mortgage are not deductible but rather capitalized )

13. Legal and other professional fees (Tax preparation for your business part, not the personal part)

14. Point/loan cost when you refi- you generally cannot deduct the full amount the first year but have to deduct them over the term of the loan.

15. Repairs (Note always do repairs rather than improvements to rental because repairs are deductible right away and do not have to depreciate over many years as done for improvements. Repairs do not have to be recaptured (unlike depreciation) when you sell the house as well.)

16. Utilities - Pest control and such

17. Pre-rental expenses (expenses incurred before finding a tenant)- Startup cost.

18. Any equipment you rent for the rental business.

19. Home office: Also, If your home qualifies for a principal place of business for RE activity, any mileage to any rental property is deductible.

20. Education - You have to be careful of the education that you do before you buy the property, they might not be deductible.