So there’s this golf championship coming to University Place in a few weeks. Tens of thousands of visitors are expected to attend — including golfers, officials, media representatives and fans.
If you live nearby — and nearby could extend to Lakewood, Fircrest, Tacoma, DuPont, Gig Harbor, Anderson Island and beyond — you have perhaps thought of renting your home for a week or two. Or perhaps you have already signed a rental agreement.
You’re rich, right?
Well, you are probably not as rich as you thought — especially if you haven’t yet considered the taxes you might be required to pay.
As in sales tax, as in lodging tax, as in any special taxes that governments might have levied.
And then there’s insurance. Don’t assume that your homeowners policy will cover any casualty or liability losses. It might, or it might not, and if there’s a problem you could sail into the rough and face a large financial triple-bogey.
If you’re renting for just one week, you might not owe any tax. If three weeks, then maybe. The State Department of Revenue website offers a good primer at http://1.usa.gov/1ELOfE0.
The News Tribune spoke last week with Rob Stephens, general manager for Avalara MyLodgeTax, a sales tax management company based on Bainbridge Island.
According to his biography, Stephens is a “finance expert for the rapidly growing short-term lodging marketplace.” He co-founded HotSpot Tax, which later became a part of the Avalara product lineup known as Avalara MyLodgeTax, which is “an online solution for lodging tax and compliance in the short-term rental space.”
Question: Overall, in Washington, what responsibilities will homeowners have if they rent their homes for short-term events, such as the U.S. Open?
Answer: You could be obligated to collect the tax from your guest and remit it to the Department of Revenue. These taxes are business taxes.
Q: How aware do you think people are about short-term rental taxes?
A: Most people are not aware. There’s a significant lack of awareness. People may be aware, but in the actual process of registering, people fall out at that level. Most people doing this are not aware of the requirements.
Q: What if a homeowner doesn’t feel confident negotiating all this alone? I know that Avalara offers services. Is there other help available?
A: People use a real estate agent or property management (company). That’s typical. Most property managers will handle these taxes.
Q: In your experience — you have your own vacation-rental property in Vail — what’s the biggest mistake people make when renting?
A: I think the mistake people would typically make is overpricing their property, holding out for $25,000 a week when the property is only worth $15,000. I also think people overthink it, the kinds of guests. If people are paying $25,000 a week, you’re getting a high clientele. The biggest things are pricing yourself out of the market and obsessing that you have to pack up the china.
Q: Should they pack up the china?
A: To the extent that you can remove personal effects, with the $10,000 painting or the $6,000 vase, maybe you want to put that away. And guests (probably) don’t want to see pictures of your family.
Q: What about insurance? Are people covered under their existing policies?
A: I can tell you that a lot of traditional policies exclude commercial activity. If there is some kind of loss, that may not be covered. With vacation rentals, a lot of homeowners policies will exclude it. There could be significant liability. That’s a hot topic in our industry.
Q: What should people do to find out if they’re covered?
A: They should certainly ask their broker. Their broker should know that.
Q: Getting back to taxes, what are the penalties for nonpayment?
A: Generally, if you don’t do this, it starts at 5 to 10 percent, with the high end at 40 to 50 percent. It escalates. If it’s a year from now, the penalties can be significant.
Q: Are governments looking at people who rent, looking to collect?
A: There’s pockets. L.A. is active in enforcement. It’s a huge discussion across the U.S. There are areas where (governments) are seeking out the taxes. In this environment, they’re increasingly looking at the tax revenue.
Q: To conclude — people might owe taxes they don’t know they owe, they might be penalized if they don’t pay, their insurance might not cover any losses, and before they read this they might have figured they were sitting pretty. Does that about sum things up?
A: It will be interesting to see how it all turns out.