For many taxpayers, Airbnb and other rental methods are a popular way to pull in extra income. However, in New Hampshire, this might have unintended consequences. On Nov. 9, 2018, the New Hampshire Department of Revenue Administration issued Technical Information Release 2018-004 (TIR 2018-004), which provides guidance regarding the income received from the rental and sale of a home in New Hampshire. The rental income and income from the sale may be subject to the New Hampshire Business Profits Tax (BPT), creating a trap for the unwary taxpayer who rents out their New Hampshire home.
The New Hampshire personal income tax only applies to certain interest and dividend income and generally does not reach income from wages or other types of income typically subject to income tax. Many individual taxpayers may believe that this is the end of an analysis of whether or not taxes are owed on income realized from renting their New Hampshire home or the subsequent sale of the home. However, taxpayers engaged in the rental of their New Hampshire homes should look at business taxes.
New Hampshire imposes the BPT on business organizations that derive business profits from business activity in-state. The average person renting out part or all of their New Hampshire home may not consider themselves a business organization. This is a problem because if you realize gross rents from rental use of your home, you are required to register for and obtain a Meals and Rooms (Rentals) Tax license. Form CD-3, Application for Meals & Rentals Tax Operators License, requires you to declare a type of business: proprietorship, corporation, partnership, fiduciary, or non-profit. By complying with “M&R Tax,” individual taxpayers are declaring themselves a business organization.
By virtue of being a business organization, actions taken to earn rental income (obtaining M&R Tax license, advertising, maintenance of space, etc.), rental activity is arguably a business activity covered by the New Hampshire BPT. As a result, you may be required to file a return and pay any BPT due if gross rents from the rental use of your main home or additional home exceed $50,000 for a taxable period. In addition, the subsequent sale of a home you used for rental purposes may be characterized as a sale of business asset, in which case you may also be subject to the BPT if gross proceeds from the sale exceed $50,000.
However, TIR 2018-004 provides examples of circumstances in which sale of a home will not be subject to the BPT: The first safe harbor is if the taxpayer never used the home for rental purposes for more than 14 days in any 12-month period during the five years before the sale date. The second safe harbor is if the taxpayer lived in the home as a main home except for a single period of incidental rental use at the time of sale while marketing the home for sale, and if the taxpayer did not deduct for federal tax purposes any rental expenses incurred. The third safe harbor is if the taxpayer only used a portion of his or her main home, which was within the living area of the home, for rental purposes. If none of the safe harbors are met, then whether gains from the sale of the home will be subject to the BPT is fact-specific.
Based on this notice and the ease to list rental properties online, taxpayers in New Hampshire should be aware that they might be subject to the BPT on rental income from properties they own directly. In addition, if taxpayers later wish to sell homes that were previously used as rental properties, they should be aware of both the safe harbors provided in the notice and the factors that could determine whether they are subject to the BPT for the sale. As tax season approaches, this is a great time for taxpayers and their trusted advisors to evaluate tax implications of activities taken in 2018 and to make a plan for 2019.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How do you think this notice will impact New Hampshire taxpayers who rent part or all of their homes and may not consider themselves engaged in business activity as a business organization? Why or why not?
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