Legal & Tax Requirements For Florida Vacation Homes
You can only rent out your Florida home on a short-term Vacation Rental basis if:
Your sub-division deed restrictions or homeowners association has no ban on Vacation Rentals, and
Your city or county has no ban on Vacation Rentals.
If your home is to be "rented to guests more than three times in a calendar year for periods of less than 30 days or 1 calendar month, whichever is less" then you must first obtain a hotel license from the Florida Department of Business and Professional Regulation. This is required by Chapter 509 of the Florida Statutes (see note 1 below). Overseas owners are required to obtain a US Individual Taxpayer Identification Number (ITIN see below). If the ITIN cannot be quoted on the hotel license application you will have to prove that one has been applied for. A temporary hotel license will then be issued until you can supply the ITIN.
Homes are inspected before a license is issued in order to establish that they are appropriately equipped with things like fire extinguishers, hearing-impaired smoke detectors and battery backed emergency lighting. Call the department in Tallahassee on 1-800-488-2740 to find your nearest office where you can obtain the forms and details of other requirements.
Most cities or counties that have created Vacation Rental Ordinances use the above definition. Check with your city or county zoning department to obtain a copy of any local ordinance. An ordinance may require you to obtain an occupational license and also register your home each year.
Individual Taxpayer Identification Number for non-residents
The IRS requires that the taxpayer request their number when they file their first income tax return. The application is submitted with the return to the ITIN unit. If a non-resident homeowner sells their home and requests an exemption from the withholding, the seller and the buyer must supply their ITIN, social security number or Form W-7 (application for ITIN, for link please see below), with the application. Also, an exemption to apply early for an ITIN is allowed for those non-residents that need and ITIN for licenses or banks. Proof of the need for an ITIN for the licenses or banks must be attached to the application. A Certified Public Accountant (CPA) can be an Acceptance Agent for the IRS for ITIN application which will streamline this process. For additional information on this topic, please contact Jan Marie Doughty CPA, of Jan Doughty CPA PLLC on 01243 536026 or to use email please click here.
Sales and Tourist Taxes
You will also have to register for and pay Sales Tax with the Florida Department of Revenue on all rental monies received. Call the department on 1-800-352-3671 in Florida, or 850-488-9750 from elsewhere, to find your nearest office. Some cities and counties also have a Tourist Tax. This is sometimes payable to the state with the sales tax, but in other cases the city or county handle it themselves. Where this is the case you will have to register with your city or county Tax Collector List Tourist tax is also due on rental monies received. Sales and Tourist taxes can be paid online.
The value of the furnishings and equipment in your vacation home is also subject to Tangible Personal Property Tax because your home is rented. You will again need to register with your city or county Tax Collector. Tangible taxes can be paid online.
Annual Tax returns
Overseas owners of Florida Vacation Homes who rent their property must file a US 1040NR tax return each year. First you must obtain a US Tax Identification Number ITIN by completing a form W-7 and sending it to the IRS click here for form. Before starting to rent it is essential that overseas owners complete a W-8ECI form and give it to their property manager, otherwise the property manager is obliged to deduct 30% withholding tax from all rentals that they receive. Filing the W-8ECI form allows you to file your 1040NR tax return on a "net basis" i.e. from the rentals you can deduct expenses and will only pay tax on any profit. In addition to all normal expenses, you can deduct mortgage interest and can depreciate the property (but not the value of the lot on which it stands). Most overseas owners find the US 1040NR tax return too complicated to complete and use someone to prepare their tax return. The Useful Links pages on our Web Site lists two tax preparers that our subscribers have recommended. All IRS forms and completion instructions can be obtained from the IRS web site.
Overseas owners will also have to report the rental income and expenses of their vacation home for tax purposes in the country in which they reside. If there is a tax treaty between the US and that country then any tax paid in the USA will probably be deductible against tax payable in the other country. For details of UK tax see the separate page on this subject.
US Taxes For Foreign Owners
The deadline for filing a US tax return is June 15th. The US tax year operates on a calendar year basis. Overseas owners of vacation homes are required to file a US tax return if you rent your home for more than 14 days in any year. So if you had more than 14 days of rentals between January 1st and December 31st last year you should file a 1040NR return by mid-June this year. Joint filing for married couples is not allowed and each part owner needs to file a 1040NR to claim their portion of the business deductions. The NR in the form number identifies that it is a return by a non-resident. US citizens and US green card holders have to file different returns by even earlier dates.
Don't panic if this is the first you have heard of it and the deadline looms. There is still time to avoid penalties, and if you read through to the end you will realise that for most people it is a paper exercise that involves the payment of no tax. Let's just address the June deadline issue so you can relax a bit. You need a US accountant or tax return preparer to do the job for you. We know few foreign owners who tackle the job themselves. The fee is typically between $150 and $300 per home, though it can be more if multiple returns have to be prepared. So find someone to do it for you. Your property manager or bank can probably suggest someone, also look at the Homeowner Links pages on our Web Site for some that have been recommended by subscribers. If time is short, ask them to file an extension request for you. Extensions of three or six months are granted automatically, provided you request one. Your tax return preparer can file the request on your behalf, so there is nothing you have to sign that need delay the process.
The good news about the next part is that, judging from owner's comments, the US tax rules regarding rental income and expenses are very clear and uniformly applied by the IRS. Most owners are correctly advised by their tax return preparer that it is in their own interests to declare to the IRS that the rental activity is to be treated as a US business. This is done by completing form W-8ECI (previously called form 4224) each year, and sending it to your property manager, as well as making this election on your tax return. This form officially exempts your property manager from the legal obligation to deduct 30% from any rental income before sending you the balance. It also provides you with the right to deduct expenses, mortgage interest and depreciation from the income in arriving at a profit or loss figure for tax purposes.
Since the US tax system is a self-declaration system, it is up to you to gather all the information on income and expenses, and in consultation with your tax return preparer, compile the figures for the return. The IRS uses a sophisticated computer system to check all returns, and decide who should have their returns audited in person by an IRS inspector. Since the IRS also has a mass of other information from banks, mortgage companies, property managers, and the sundry people and organisations that provide you with services, it is a dangerous exercise to hope that they will never catch you if you decide that filing a return is too much bother.
As we said before it is largely a paper exercise. Apart from the proportion represented by your own occupancy of your Florida home, you can deduct all the running costs and maintenance, the costs you incur getting rentals, such as advertising and mailing details to enquirers, and even your tax preparer's fee. You can also deduct the interest part of your mortgage payments, and any insurance and property taxes that you may have to include with your mortgage payments. Your tax preparer will also compute a depreciation deduction that you are allowed to set against the rentals. The price you paid for your home, less the value of the land, can be depreciated over twenty seven and a half years. Similarly, the furnishings and equipment you put in to make it rentable, can also be depreciated. This is usually over a shorter period such as seven years.
By the time all your deductions are added up, you have to achieve an exceptionally high occupancy level before you become liable for US income tax. And any tax you have to pay in the US can in any event be set off against any UK taxes that result from the same rental activity, because the UK has a tax treaty with the USA. Other countries have similar treaties with the USA.
So the whole paperwork exercise is not as daunting as it first appears. Before we leave you though, we want to address two common questions. As far as the US tax authorities are concerned, you must report all income "effectively connected with" your Florida home. Just because you collect some of it overseas does not exclude it from their grasp. As to whether or not you can legitimately claim any part of your travel to Florida, you must lean on your tax return preparer's guidance and your own conscience. One way of coming to a decision is to think how comfortable you will feel having to justify it, if you are across a table from an IRS inspector who is auditing your return!
UK Self Assessment Tax Return Tips
If you are a new owner worried how to complete your UK self-assessment tax return, or an existing owner who hasn't been able to face the new forms, here are a few notes to guide you.
If you rent out your Florida property you must - by law - complete your tax return accordingly declaring either profit or loss. Failure to do so will leave you liabable for all back taxes due - up to the year of purchase.
If you don't rent your Florida property and therefore have no income from it, then you don't have to submit any figures for it at all. However a new owner who had no income in the tax year to April 5th but had expenses, should submit a return in order to get the tax loss, caused by the expenses, carried forward to the next tax year where it might save you some future tax.
Next all the income from overseas property has to be reported in the F supplement for Foreign Income, and not on the L supplement for Land and Property. Since the F form is not mailed automatically, you will need to telephone the order line and request the form and the notes on how to complete it. Alternatively, it can be accessed here: Foreign Forms. (please scroll down the page to find the forms). The notes are generally quite helpful, but we will stress a few points.
You can convert US dollar income and expenses to pounds using the Inland Revenue's official exchange rate for each tax year, which you can obtain from the Self-Assessment Help Line. For the year to March 31st 2007 it was 1.8932
The first point to be aware of is that if your income from your Florida home is less than £15,000 in the year, as we expect it will be for most readers, you do not have to list the expenses in detail. Remember since married couples have to file separately, that only half the income and expenses of a jointly-owned home has to be declared on for each return. So most returns for jointly owned homes would fall below the limit. To calculate the total income and expenses you will need to combine the figures from your property manager's summary with any income and expenses that you have handled yourself. Expenses do mean out-of-pocket expenditure, and you are not allowed to charge for your own time. Equally the Inland Revenue do not normally allow the cost of travel to your Florida home if you combine it with a vacation. Remember however that you are allowed to include in the expenses any interest that you have paid on a mortgage for your Florida home.
Now we come to the question of personal use. If you have used it yourself, or relatives and friends have used it without being charged, you will need to insert a figure in the box, reducing the expenses by the proportion appropriate to the free use. The guidance notes do allow you to alternately net off the free use, and only claim the expenses appropriate to the rented weeks in the other boxes. Either way, if you used your home, or offered it free to others, don't try claiming all the expenses, otherwise a tax audit could prove a costly business.
If the end result is taxable profit, then you will pay tax on it at your highest marginal rate. If however you have made a taxable loss, you are able to carry it forward to offset any future profits. If you paid any tax in Florida you can offset this against any tax due in the UK. Fortunately there is no tax charged for the enjoyment your Florida home gives you.
Sale of your property for non-residents
Due to depreciation, mortgage interest and other operating deductions, your rental property will probably generate a tax loss while being rented. These losses are accumulated on Form 1040NR and carried forward to reduce future income or gain from the sale of the property. If a gain on the sale of the property exceeds these losses, the net capital gain is taxed at a maximum rate of 15% (10% for individuals in a 15% tax bracket) provided the property was held for longer than one year. If the property is sold at a loss, no tax liability results. However, regardless of whether or not you have a taxable gain, a withholding tax equal to 10% of the gross sales price may be required to be withheld from the seller's funds at closing. When you file your subsequent calendar year Form 1040NR and report the sale of your property, the withholding tax is reported as a credit. This credit is applied to any tax due from gain on the sale of your property and any excess will be refunded to you. If you have no gain, all your withheld tax will be refunded to you.
There are certain exceptions to the withholding requirement that may be applicable. You may summit an application for a withholding certificate or an application for early refund to the Internal Revenue Service (I.R.S.) to reduce or eliminate the 10% withholding tax on the sale. In both cases, the basis of the application is that the actual tax liability is less than the amount withheld. An application for a withholding certificate is generally prepared prior to the sale closing. The closing agent will withhold the 10% and retain it in an escrow account until the I.R.S. responds to the application, usually within 90-120 days. Upon receipt of I.R.S. approval of the application, the appropriate amount of tax due (if any) will be paid over to the I.R.S. and the balance of the amount withheld will be returned to you. Thus a withholding certificate filed before a transfer notifies the closing agent that a reduced or zero withholding amount is required.
An application for early refund is similar to an application for withholding certificate except that is submitted after closing and remittance of the withholding tax to the I.R.S. If this application is approved, the amount of withholding tax is refunded to you usually 120-150 days.
Since this is a complex issue, professional advice should be sought. For additional information on this topic, please contact Jan Marie Doughty CPA of Jan Doughty CPA PLLC on 01243 536026.