Hipcamp and Sniffspot: Can I deduct property taxes?

[pspadoni]

I have a vacant 12-acre wooded lot next to my house. In 2021, I rented it to dog owners who wanted a private place to walk their dogs, using the website Sniffspot, which operates like Airbnb but is for people who want a private place to take their dogs. I didn't make much money, about $300. In 2021, I am going to rent the site out to people who want to camp, using the website Hipcamp. Again, this is much like Airbnb, with a review and rating system for both owners and clients, and some insurance provided by Hipcamp. I believe I can make $2,000 or more doing this. My question is, for my business expenses, can I deduct all or a portion of the property taxes? The property is not used for anything else. It is just woods and trails. But I pay $5,000 a year in property taxes on it, so if I deduct all, my business is going to be a net loss.

[Mike9241 · Accepted solution]

most likely you will show losses year after year if revenue is only $2k while the taxes are $5K. after several years of showing losses, the IRS may audit your return and attack the losses as an activity not entered into for profit. then you will owe the additional income taxes for each open year, penalties and interest.  the IRS would say the revenue is taxable while the taxes can only be deducted along with other taxes on schedule A - so you would have to be able to itemize. even if you do itemize, currently the schedule A tax deduction is limited to $10,000 so if you are already there these additional taxes will not benefit you.  

[Carl]

It seems apparent to me that you would not be renting the property "for profit". After a number of years (3 to 5) the IRS may see this as hobby income. While hobby income is reportable and taxable, any expenses associated with that income are not deductible.

If it does qualify as rental income, then it would most likely be reported on SCH E and not SCH C.

[pspadoni]

Thanks for the great answer. It seems to me that if I can expand the business in future years, it could become profitable on its own. I have room for many campsites, so I can develop more given some time and sweat equity. I also have a landscaping business that has shown a reasonably good profit for the past 25+ years. Can I just include the camping gig as part of that business? Then I would never be showing a loss, but on paper it would reduce my profits and save me some taxes. 

[pspadoni]

Thanks for the great answer. It seems to me that if I can expand the business in future years, it could become profitable on its own. I have room for many campsites, so I can develop more given some time and sweat equity, and perhaps within 3-4 years, it may be profitable. I also have a landscaping business that has shown a reasonably good profit for the past 25+ years. Can I just include the camping gig as part of that business? Then I would never be showing a loss, but on paper it would reduce my profits and save me some taxes. I'd appreciate your opinion on this idea.

[Mike9241]

different businesses need to be reported separately.  

[Carl]

Can I just include the camping gig as part of that business?

No. Your landscaping business produces "active" income; meaning that you have to go out and actually "do something" on a recurring basis to actually earn that money.  So that gets reported on SCH C.

Whereas the rental business produces passive income; meaning that all you do is "sit there" doing nothing on a recurring basis to get that money. So the rental income is reported on SCH E.

Now if you develop it as campsites, then it's possible the income received from that endeavor could be considered active income and reported on SCH C "if" you supply your tenants services on a recurring basis that are "directly beneficial to the tenant". But the key is that:

1) Services provided must be directly beneficial to the tenant

2) Services are provided on a recurring basis. (What constitutes "recurring" can in some scenarios, be a grey area.)

But either way, you  "generally" can't combine both endeavors into a single business because the service/product provided is not like-kind. It can get kinda complex though. For example, a business called "Wally's Burger's & Laundry Center" can provide both active income on the food side and passive income on the laundry center side. But it's perfectly possible for things to be set up so that all income is considered active income and reported on SCH C.  (Not a good example really.)

[tdean3]

In 2023 we know all income are taxable but we would need to look at the fact that we may need

1. Forms for income over $600...yes all income are taxable

2. Did we operate all year or less than 15 days... on Airbnb less than 14 days may not qualify as business

3. Can you deduct only $300 of property taxes ?

4. Did you provide food to the campers? this would make it passive income like in bed & breakfast

[pspadoni]

Carl, thanks again for your astute answer from a year ago. Now my circumstances have changed. After a break where I made some improvements to my property, I started doing Sniffspot again a couple of months ago. The results have been surprisingly great, and now I am projecting that I will gross more than $7,000 in 2023. So I have dropped plans to do anything else with the property other than rent it as a Sniffspot (essentially renting it by the hour to people who want to use it as a private dog park). In this case, can I deduct the full $5,000/year in property taxes, since this property is used solely for this business? I expect to show a profit, as my expenses are minimal.

[JosephS1]

I believe this is a case of "it depends".  You stated the lot is 12 acres.  Have all 12 acres been developed and are being utilized for your Sniffspot?   If so, I believe the total property taxes may be deductible against the rental income.  If not, are you planning on utilizing all 12 acres for Sniffspot in the future?  Currently, if aIl 12 acres are not being used for Sniffspot, I believe you need to allocate the acreage used for Sniffspot to the acreage as a whole for the property tax deduction and report the income and expense on Schedule E as a rental property.

If you have plans to expand to the full 12 acres if they are not currently being used, and you have a development plan in place for the remaining unused land, if necessary by municipal code, the remainder property taxes may be considered as part of the development costs for future expansion; and while land can never be depreciated, land improvements may be under the right circumstances.

@pspadoni

[Carl]

I assume this is a legitimate business as far as legalities go. I would expect the business to be registered at some level of government. Even if it's an occupational business license from the city or county where it's located. Or could be registered at the state level as a DBA, a sole proprietorship, an LLC or even as a corporate business structure.

If 100% of the property is business use, then 100% of the property taxes would be deductible.  However, for the first year the property was not 100% business use the entire tax year. So the deductible property taxes would be pro-rated for that first year. Not a big deal really, and I believe the program will handle the pro-rating for you based on the "in service" date; but I'm not 100% sure the program will handle that correctly. So double-check the numbers yourself on that.

While the property itself is not a depreciable asset, there are times when certain property improvements are. If it helps, take a look at IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf  Apendix B starts on page 97, and on page 98 asset class 00.3 covers land improvements which are depreciated over 15 years under GDS in MACRS.

[pspadoni]

Thanks for your helpful and thorough answer! I do have trails winding throughout the woods on all 12 acres. I only made about $400 in 2022 ($300 of that in December), but it was very active in January and I made $650. As the weather improves and the days become longer, I may make even more per month. I'm also getting quite a few repeat visitors now.

[Carl]

Trails most likely would not add any value to the property and the cost of creating such trails would probably not be a depreciable expense. I can't say if it would actually add to the cost basis or not though. However, it's possible (though I can't say for sure) that if you built and install things such as a bridge over a ravine or something of that nature, that would probably qualify as a land improvement that's depreciable over 15 years. But again, that's not something I'd commit to, when it comes to depreciable assets.