This post is by Sheral Reddy, an chartered accountant and tax specialist at GECA Chartered Accountants. Call Sheral now for tax advice on your circumstances.
Tax Impact for Change in Use
Properties rented out for short-term accommodation and as well as being used by property owners come under the Mixed-use asset rules. The mixed-use asset rules limit deductions in relation to the property and any excess deductions are quarantined and offset against future year’s rental income.
Due to the Covid-19 pandemic and international travel bans, the Airbnb property owners have had a significant impact on their income from Airbnb properties and some property owners have had to make some tough decisions during this time.
Some are bearing the ongoing property costs in wait for the economy to recover, some are selling their properties, some are moving into those properties themselves and others are switching from short term rentals to long term fixed rentals.
Change of circumstances to the rental property may lead to change in use and as a result Airbnb property owners’ need to be aware of the GST and tax implications.
For example, if a property owner decides to start renting the property to a fixed long-term tenant the property will be then subject to the new legislation for ‘The Ring-Fencing of Residential Rental Property Losses’ applicable from 1 April 2019. Under this legislation any expenses or deductions greater than the residential income is ring fenced and available to be offset against future year’s rental income.
If your Airbnb activity was registered for GST, then you will also need to account for the GST on the change of use. If the change of use is temporary, then a change of use adjustment will be required in the next return and this would be a proportionate calculation. However, if the change of use is permanent, then a final adjustment will be required in the next GST return ceasing the taxable activity and return of GST on the property as deemed market sale value.
The new legislation ‘The Ring-Fencing of Residential Rental Property Losses’ is not applicable to Airbnb properties being rented out for short term rentals and being used by the property owners as well. However, any properties rented out for short-term rentals 100% of the time as an Airbnb without being used by the owners will be subject to the Ring-Fencing of Residential Rental Property Losses. As the activity won’t have any private use element and won’t be considered as a Mixed-Use Asset.
Please refer to our previous publication on ‘How to choose the right business structure for your residential rentals after ring-fencing losses were introduced”.
We suggest Airbnb property owners to consult with their accountants or tax advisers if they are planning on making any major changes to their Airbnb activities. Please contact your GECA advisor now on 0800 758 766 if you require any assistance with either your short- or long-term rental properties and if you have any questions as to how the change of use impact you as a property investor.