It’s been said we are on the cusp of the fourth industrial revolution. A revolution built upon an ‘Internet of Things’, a blurring between the lines of the physical and the digital. This may be an odd sentiment to start with, but the very question of changing your property from a residential rental to short-term accommodation is a small part of this revolution. Like Uber disrupting traditional taxi services, Airbnb has tempted property investors away from providing a home, to providing a holiday.

However, with all disruptions and revolutions the last thing to adapt is regulation, which means the profitability for those at the forefront of change, will be very different once regulations catch up. The perfect example of this is the sudden additional levies imposed by the likes of the Auckland and Queenstown Councils once they realised the prolific number of Airbnb properties.

So with a 200% increase to your rates bill, is it worth changing your property investment to Airbnb and the like?

The Good

Short-term accommodation income relies on two principles, tariff and occupancy. Often the nightly tariff for a well-placed property can exceed the weekly residential rent, and for many this alone seems worth the change. However, this benefit can quite quickly disappear when you realise that your property is only wanted during summer, leaving it mostly empty for eight to nine months of the year. Therefore, in your decision-making process step one is to ensure that you do your research and understand what your likely occupancy rate and market tariff will be.

Receiving income from short-term accommodation, but being less utilised when compared to a residential rental is not necessarily a bad thing, in fact it can feel like working less for more money. But this is not always the case. A good residential tenant can treat your property like a home, where they maintain and look after it, whilst short-term accommodation will have a high turnover of unknown occupants, therefore the risk of damage and wear and tear can be heightened, and the chance of sudden and extreme damage more likely. Step two in your own revolution is to understand what type of occupant your property will attract, the likelihood of damage and whether your intermediary Airbnb covers costs for that damage.

The Bad

Short-term accommodation will at least double your costs when compared to a residential rental. Management fees and commissions are at least double (if not triple ) those of a standard residential property. There are furniture, linen, and kitchenware costs, then the ongoing costs of power, water, and cleaning. So, step three, brush up those Excel skills and do a cashflow comparison to see how much you will have left. If you want a quicker and easier way to do this then just contact us to do it for you.

Upon writing this article income tax legislation is not particularly in favour of short-term accommodation providers. However, that could change drastically when ring fencing of residential rental losses comes into place, as short-term accommodation losses will not be affected by these rules. A significant number of Airbnb properties are mixed use (rented to third parties and utilised personally by owners, family and friends). When mixed use rules apply the claimable deductions for property expenses can be heavily stifled. Step four is to discuss with a chartered accountant with property experience (like us) to understand how these rules might affect you and how best to structure assets.

The Ugly

Short-term accommodation is subject to GST, unlike residential rents which is exempt. This means that if you or one of your entities derives more than $60,000 of GST taxable income in total, or you are already GST registered for another activity, then your Airbnb will be subject to GST. On the surface this may not seem to be a concern as there is an expectation that it simply means you have to pay GST on the income received, however losing at least 15% of your profit is only the tip of the iceberg. Your entire property is now subject to GST, which means that at best you will lose 15% of the capital gain made on that property when you sell or change the use of the property. At worst you will lose 15% of the actual market value of the property if you sell or change its use again. Step five, do not rent your property on a short-term basis until you’ve talked to an accountant with specialist knowledge on GST and property. You could be with Airbnb a long time before recovering any capital gain.

Nick and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz