IVU Taxes & Short Term Rental Houses

Mrkpytn may know, he has been doing short time rentals for years.

Thanks.  I am hoping there are others on this site that have vacation homes and have encountered this issue.

hmmm,  can you explain what these tax acronyms mean?

I am not sure what "Rental houses" is referring to. Is it you as the renter or are you renting it out? Here is my situation. I have had a home for 13 plus years in Ponce. It would sit empty when I was not there. When Airbnb made itself known about 4/5 years ago I opened my home with one room available. This was when I was in town. I think I was the first in town as an airbnb. I have a bancopopular account but when I set up my airbnb account I used my paypal account that is based out of my US bank account. My income is made outside of Puerto Rico even tho they are paying to stay in my Puerto Rico home. Airbnb is unique in that it is not a hotel and the guest share a space with the owner. I believe there is a limit to how many rooms you can rent and whether you are sharing the same building with the guest or not. It is sort of like my other business where I produce a product in the States when I am here and the same product in Puerto Rico when I am there. When I Make the product in Puerto Rico I sell it to a market in the US and the funds come from the US. I think this is  the same as airbnb.  If I rented to someone living in Puerto Rico I think Puerto Rico taxes would apply. If someone from Puerto Rico rented on airbnb it would be processed through my US account and be exempt from PR taxes. This is how it has worked for me so far.

Our vacation house is registered with the Hacienda Dept. and classified as a "other services of accommodation" code. This code is used by the IRS and governments in North America to track types of businesses created and in existence. A business with this code is exempt from paying the IVU taxes, according to our research. This coded entity is only required to register with the Hacienda and pay the Tourism Company.  According to our research, a short term vacation rental home is not classified the same as a hotel or B&B.  I was just wondering if anyone on this site has had any experience with this issue.

Our CPA is telling us if you generate income in Puerto Rico, it must be reported to the Hacienda, regardless of where you live or bank, or where the payor is from.

So far, from what we have learned is that a vacation rental house is exempt from paying the IVU taxes, PROVIDED it is registered with the Tourism Company and paying the room tax of 7% of income generated each month from the rental house. The penalties for not are steep, and without that certificate, the Hacienda is coming after you for their 10.5% plus penalties, and the municipality wants their 1% too.

This is interesting. From my limited experience if a room tax/sales tax is required it is paid by the renter through airbnb. So in PR, the owner has to add up their receipts and submit 7% to the tourism company? That is a lot of money in a low margin business.  Also, it is monthly, which is a pain in the ass to file/submit. Airbnb needs to get on this and incorporate it with their system. I have a feeling a lot of people are not registering.

Mrkpytn wrote:

If someone from Puerto Rico rented on airbnb it would be processed through my US account and be exempt from PR taxes. This is how it has worked for me so far.

I am no expert, but there is no way way this is true. An occupancy tax is basically a sales tax on hospitality, just as if you had a banana stand in PR and lived in the states, you would still pay sales tax on banana sales. That being said, and referencing my previous comment, until this is incorporated into airbnb, it's likely a 50/50 thing. So hopefully they build it into the system so the playing field is even.

I will look into this when I am back and talk with the other airbnb hosts. I know this has been an Issue in NYC but in many places it depends on the amount of rooms too. One thing I know for sure is that if you have a banana stand you do not have to pay sales tax. This also includes other fresh fruits and vegetables.  Now I have to look at the possibility if I create a piece of artwork using materials that I brought  with me while I am in my PR house and a guest from outside of Puerto Rico buys it do I have to charge PR sales tax?

I think what you are going to find, and I am interested to hear it, is that some people simply don't bother paying the airbnb tax, there is probably very little oversight and they aren't going to hunt you down. So if you have a small operation, nobody probably cares.

Wait, are you saying there is specifically not a sales tax on fruitandvegs? Or just that nobody that has an actual stand pays them? I was just using that as an example.

Fresh fruit and vegetables are not taxable. My memory tells me that I do pay tax on non food products at the supermarket and not on food products which would mean that food is not pre taxed.

I will share with you our experience in the hopes that you do not need to go through the stress and anxiety we did, trying to finagle our way around the island government to conduct a legitimate business of a vacation rental house.   

We registered our vacation home with the Tourism Company in March of 2015 and started paying 7% taxes each month on the earnings generated from the rental.  We registered because we had heard and also read that the penalty for not registering is $25,000 plus fines and penalties. It wasn't worth the risk of getting caught doing something illegal or under the table. It would not be difficult for the IRS to subpoena  VRBO, AirBnb, etc., for the payouts they made to us, or see the income in our bank account(s).  We reported our earnings on our income tax return and paid the Tourism Company each month.  We didn't know anything about the Hacienda Dept.

In February 2017 (two years AFTER registering with the Tourism Company), we went to a CPA here on the island. The CPA told us we had to report our earnings to the Hacienda (basically the Dept. of Treasury), and that we were supposed to be charging renters 10.5% IVU tax and 1% municipality. The penalties for not reporting the earnings for the past two years totalled over $8,500, and was increasing each day the monthly payments were not made.  We also ran the risk of having our rental house shut down and our front gate padlocked if we were caught not reporting it.  We were astounded that the island expects us to pay 18.5% of the income gathered from renting our vacation house.

We did some research, asked other hosts, and eventually, fortunately, learned that IF YOU ARE REGISTERED WITH THE TOURISM COMPANY WITH A NAICS CODE OF 721199 (North America Industrial Classification System, Code 721199 "Other Traveler Accommodation"), YOU ARE EXEMPT FROM PAYING IVU TAXES to the Hacienda Department.  A vacation rental house does not provide foods, goods, or services, but just lodging -- which is exactly what we do.   

When we showed our CPA the 2015 registration and a certificate from the Tourism Company and our initial registration application from 2015, that had us classified under "Other Traveler Accommodations, Code 721199", our IVU taxes, late fees, and penalties through the Hacienda Department were waived (thank Goodness!).  Our only requirement to the Hacienda Department is to: (1) be registered with them, and (2) report our earnings monthly to them.  We continue to pay the Tourism Company the 7%. 

All hotels and B&Bs on the island are required to charge the additional 11.5% (IVU to Hacienda and municipality), and 7% to the Tourism Company, explaining why their rates and fees are higher than us little vacation houses!  And it all has to do with the NAICS classification code and whether you provide food or beverages to guests. 

We're learning as we navigate the murky waters of government and business here, and we are hopeful that this information is useful to anybody operating a short term rental, or considering it in the future.

Thanks Melendezki for this post.  I know that a few of us are contemplating supplementing our income with "AirBnB" type rentals.  Good to know that there's no need to charge for IVU if you are registered as "Other Traveler Accomodation".

If you simply rent out a cottage while you are not in residence, this seems to be "Other Traveler Accomodation".  But what if you rent out a room?  The NAICS description for a Bed and Breakfast references two distinguishing characteristics.  The first is a "highly personalized service" and the second is the provision of a "full breakfast in the room rate".  So it appears that if you rent out a room and only provide a continental breakfast, you are not a B&B, and need not pay the IVU.  Or, if I am reading NAICS correctly, you can provide a full breakfast, but only with lousy service  ;-)

Here's the link to the NAICS for B&Bs:
http://siccode.com/en/naicscodes/721191 … kfast-inns

Besides WarnerW question, I have one of my own .... Is it ok to invite the guests to a BBQ at our place? Not as part of the daily rate, just a friendly meal?

Seems to be the case Rey.  The way I understand it, the question is "What's included in the cost"?  Are you advertising a room and dinner?  Is this something that would be provided to all of your guests?  If not, then you don't seem to be a B&B.  You're just a gracious host. 

My idea is to have spare bedrooms and baths in my primary residence, all with private entrances.  I'd also like to provide, as a courtesy, some coffee and breakfast pastries for the guests.  I figure so long as it remains  a "continental breakfast" and doesn't rise to the level of "highly personalized service", that I'm not a B&B either.  A fine distinction, but I clearly want to be on the one side, and not the other (or else my rates go up 20%).

Our CPA very specifically asked if we provided any prepared food to our guests, which we do not. We have a welcome basket at check in with  packaged coffees, creams, pastries or local bread. I think the serving of prepared foods is the distinguishing criteria. You may want to put a little kitchenette in the rental room and avoid the whole issue.

Funny Rey!  From what I heard about your cooking, you may have to charge them to eat! Hee hee.

melendezki wrote:

Funny Rey!  From what I heard about your cooking, you may have to charge them to eat! Hee hee.

Hey!
I only burned my kitchen once!
LOL

A guest once asked me what is for breakfast. I answered what do you mean what is for breakfast and she said John, her husband, likes eggs and I answered I do not do eggs and if John wants eggs he can go in the refrigerator and make them himself.  She later said that they had just come from an airbnb and they had a seven course and I asked how many people were there and she said about 14. I said that  was a hotel advertising as an airbnb. Airbnb does not imply you get breakfast, It is the name of the organisation that takes a fee from the host and a fee from the guest.

I guess I will need to tell the wife that we can not do a B&B due to taxes. She wanted to do that. I will follow Kim's Lead and just provide them a nice place with a pool and they can go out to eat or cook their own.

http://caribbeanbusiness.com/airbnb-to- … overnment/

Just saw this article on Caribbean Business website, looks like things with Airbnb might be changing so that Airbnb will directly pull the 7% instead of hosts needing to report and pay?

  "SAN JUAN – Aiming to boost tourism on the island, Puerto Rico has signed a deal with Airbnb under which the company will collect a room tax from the island's hosts and turn the revenue over to the Puerto Rico Tourism Co. (PRTC).

Under the agreement, Airbnb will charge a 7 percent tax it will send to the PRTC. Gov. Ricardo Rosselló said Thursday that collections will begin in August, adding that the deal will ensure the collection of more than $2 million in taxes.

The San Francisco-based company has more than 4,300 hosts and 7,100 listings in Puerto Rico."

Well that insures I'll go with AirBnB instead of VRBO!  Plus VRBO has a $400 annual fee per property on top of another $129 per rental booking!

Melendezki is an expert on that, she list her place with two or 3 agencies.

how much does AirBnB charge ?

Airbnb will be charging the 7% tax. They also have a monthly or yearly charge to the owners and a transaction charge.

Average for Airbnb (just the room) goes from about 50 to 200, price is set by owner.

A 3 bedroom house typically goes for 140 -250 a night for any number of guests up to 8 on average. So for families it is fairly inexpensive.

Beats 375 a night per suite and a family needing 2 to 3 suites at a hotel.

What I mean is, what does AirBnB charge for advertising, booking, fees etc.?    Cost to the landlord?

AirBnB charges you a 3-5% of the room cost. They already collecting taxes for other states, now instead of you as the renter having to send the 7% tx to turismo every month, they will be doing it directly. I think it's a good initiative to prevent people from not sending the money to the government. Look at the problems with business not sending the IVU now.

So taxes 7% and admin cost 3-5% - about 12% off the top, then your cleaning and maintenance upkeep costs, maybe 15%;  net cash after expenses approx 70% of rental charge.     Sound like a reasonable cash flow projection?   Am I leaving out other costs?

Melendezki will be best to ask, she been doing it a while and they are my instructor.

I will send a pm

I am not sure what percentage airbnb takes but they charge me $5 dollars for $170 rate for two nights so I think it is more like 3-1/2%. They have not notified me yet about the sales tax but that may be paid by the guest but not sure yet, Cleaning fees, etc, are subject to their commission as it is the overall charge for the room.

The government just made a deal with Airbnb about room tax.
I understand that Airbnb will collect room tax and give it to Hacienda. I guess that will cause a (small) raise in Airbnb prices

"Airbnb has over 4,300 hosts and 7,100 listings in Puerto Rico.
More than 250,000 Airbnb guests were reported in Puerto Rico in the past year, an increase of 83 percent from the previous year. That activity generated more than $28 million, with the typical host earning $5,700 a year."
https://www.washingtonpost.com/business … 9f3f8f54fa

Do you get to deduct cost such as maintenance, insurance, improvements, electric and water cost from the rental income when doing PR taxes?

ReyP wrote:

Do you get to deduct cost such as maintenance, insurance, improvements, electric and water cost from the rental income when doing PR taxes?

Those strike me as legitimate business expenses, though depending on the circumstances, some of them might have to be pro rated.  I'd advise incorporating, probably as a LLC, and running the vacation rentals as a business.  You then report the business profit or loss on your personal income filing.  I do this on the mainland, with a duplex rental that I own.

As with all of these matters, best to consult a licensed professional, in this case a CPA for guidance.

WarnerW wrote:

ReyP wrote:

Do you get to deduct cost such as maintenance, insurance, improvements, electric and water cost from the rental income when doing PR taxes?

Those strike me as legitimate business expenses, though depending on the circumstances, some of them might have to be pro rated.  I'd advise incorporating, probably as a LLC, and running the vacation rentals as a business.  You then report the business profit or loss on your personal income filing.  I do this on the mainland, with a duplex rental that I own.

As with all of these matters, best to consult a licensed professional, in this case a CPA for guidance.

yes to all of those in the US, I was wondering if the same applied to the taxes collected by Hacienda in PR for the income on the short term rental.

Ah!  According to Melendezki, if you are registered with the Tourism Company as "Tourist Accommodation -- Other" then you pay no IVU to Hacienda.  You do pay 7% to the Tourism Company.  So there would be no business deduction in that instance.

However, when it came to reporting business income for personal PR income taxes, then the deductions would reduce your taxable income.  At least, that's how it seems to me.

yes business income / personnel income is what I was referring to.