Starting 2024, the rules for the short-term rentals have changed and are going to impact taxability on the rental income earned from properties.

Any dwelling unit which is rented for less than 28 consecutive days is termed as short-term rental. The government has come up with a provision to curb the shortage of housing as the properties are let out for short-term periods to fetch more money. This is an effort to handle the crisis and to have some more dwelling units available on the market for long-term rentals. The owners of the properties need to comply with the municipal conditions to rent these properties for a short duration.

Income earned from rentals is calculated after the deductions for the expenses done on various heads like property taxes, repairs, management fee, advertising, interest etc. from the gross amount of the rent received. And then tax is paid on this net income after the deduction of the expenses incurred.

With the Change as per the proposed law, If the properties are not compliant with the provisions of the municipality the income earned from the short-term rental will be higher based on gross revenue before allowing any expenses and tax is payable on that income.

It is important to note that the expense will be disallowed for the period of non-compliance only and from the date the property becomes compliant the expenses will be allowed.

For example: A property was rented for short rentals for a total period of 280 days and during those for 60 days it remained non-compliant, the expenses for the period of 60 days will be disallowed and for the rest of the part it would be allowed. So, if the properties are compliant there is nothing to worry about, and full expenses will be deductible.

The Government has given time relaxation till the end of the first year 2024 to comply with the norms of the municipality. But for the areas where the municipality restricts short term renting this will be a huge challenge. Also, it is to be seen how CRA is going to track the rental income earned as they don’t have any tool to verify the rental income earned is from which property. What if anyone declares the rental income earned from property where he complies with laws instead of the non-complied property locations.

In the coming months, we hope the government will come up with some additional information to help people and track things narrow down.

IF you need any help with the matter, Team Aaras is always there for you for case specific solutions.

Note: The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situations.

 -Raman Nagpal

B.Com, CA, CMA, DISA