Navigating the Changing Landscape of Short-Term Rentals in Armenia
The Evolution of Rental Taxation in Armenia
Armenia is seeing changes in how it taxes income from renting properties, especially short-term rentals (STRs). This has led to a lot of questions. At Hotelise.com, we’re seeing many people asking for help to understand these new rules. So, we’re going to explain the importance of STRs, the role of companies like ours, and how different countries, like the UK and Armenia, handle these taxes. We are operating in both countries and know industries inside out.
What is STR?
STRs are properties rented out for short periods, usually less than a month. They are different from long-term rentals as they are mainly for tourists, providing a flexible and convenient option. STRs help the local economy by creating jobs and demand for the whole supply chain and services like cleaning, laundry, textiles, toiletries, and managing properties.
The Rise of Property Management Companies
Governments prefer dealing with professional property management companies for STRs. Companies like Hotelise.com, offering Marriott-standard services and listing properties on platforms like Marriott, bring a level of professionalism and standardization that benefits both property owners and local communities. We make sure everything follows the rules, keep high service standards, and help make the area more attractive for visitors. Think of us as an 'Uber for Airbnb'.
Benefits of Property Management Companies:
Following Rules:Â They know all the local laws and make sure properties meet safety and legal standards.
Organized Management:Â They handle bookings, guest services, and property upkeep efficiently.
Clear Money Records:Â These companies keep detailed records of earnings and costs, which is really helpful for taxes.
Being Responsible:Â They make sure guests and properties are well-managed.
High-Quality Service:Â Good service helps boost local tourism.
Easier for Governments: It’s simpler for governments to work with a few big companies than lots of individual owners.
Helping Local Economy:Â They create local jobs and use local services.
STR vs. LTR: Understanding the Differences
STRs and LTRs differ in how they operate, the services they offer, and their legal and financial aspects. STRs have guests coming and going often, change prices based on demand, and offer furnished spaces with lots of amenities. They also need more attention to legal details and have specific insurance needs. STRs can make more money but also have higher costs and different tax rules.
Here's a deeper dive into what sets these two rental models apart:
Operational Differences:
High Turnover:Â STRs have guests staying for short periods, leading to frequent bookings, check-ins, and check-outs. This contrasts with LTRs, where tenants stay for months or years, meaning less turnover.
Dynamic Pricing:Â STR prices change often, based on demand and season. LTRs typically have a set monthly rent, making budgeting easier.
Service Expectations:
Furnishing:Â STRs are fully furnished for short stays, including things like Wi-Fi and kitchenware. LTRs might not need much furnishing.
Cleaning and Upkeep:Â STRs require regular cleaning and quick fixes. In LTRs, tenants usually handle cleaning and minor repairs.
Extra Services:Â STR hosts might offer services like local guides, which aren't common in LTRs.
Legal and Regulatory Needs:
Contracts:Â STR contracts vary and need more attention, while LTR agreements are more standard and change less.
Laws:Â STRs must follow specific rules like guest ID collection and safety standards. LTR legal requirements are usually simpler.
Insurance:Â STRs need comprehensive insurance for short stays and possible damages. LTR insurance typically covers more standard situations.
Financial Aspects:
Earnings vs. Costs:Â STRs might earn more per night but also have higher costs like marketing and maintenance.
Tax Differences:Â The way STRs and LTRs are taxed can be different, which is important for managing finances effectively.
Rental Income Taxation Systems in Armenia
In Armenia, how to tax STRs is a bit confusing right now. There are three ways being considered, but they don’t quite fit the unique needs of STRs:
Treating STRs like LTRs:Â
Guest House (B&B) Model:Â
(Defined us: Tourist house (B&B) owned and used by a natural person (host) and is a house or apartment intended for residence, where, by creating facilities for hosting tourists, a minimum hotel service is provided, combined with the provision of breakfast, services. As a rule, the host lives in that house, and breakfast is prepared by the host or a member of his family.)
Aparthotel Category (coming soon):
(Defined us: An aparthotel is a building adapted to provide hotel services, equipped with a kitchen area and equipped with appropriate equipment, intended for consumers staying for a relatively long period of time, and not intended for permanent residence of consumers.)
Demystifying the Options:
1. Treatment of STRs as LTRs:
Problems:
Ignores the frequent guest turnover and changing prices in STRs.
Doesn't consider the unique, higher costs of running STRs.
Asks for reports within 5 days of each guest's arrival, which is too demanding due to the ever-changing nature of STR bookings.
Why It Doesn't Work:
STRs have a different way of working compared to LTRs, with guests often changing and stays varying in length. Treating them the same is too simple and could lead to unfair tax charges. For instance, changing a reservation or a broken AC can affect bookings. Expecting owners to report every check-in immediately is not practical.
2. Guest House (B&B) Classification:
Problems:
Usually needs the owner to be involved, like providing breakfast, which isn't common in many STR setups.
The definition is too specific and doesn't fit the variety of STR types, particularly those run by external companies.
Why It Doesn't Work:
A lot of STRs work more like small hotels and don't fit the classic B&B style where the owner interacts closely with guests. This category is too limited and doesn't reflect the modern way STRs operate, especially in cities. The expectation that family members help out, like with breakfast, is unrealistic and outdated.
3. Aparthotel Category (coming soon in Q4 2024):
Problems:
Focuses mainly on larger buildings, not on individual rental units.
Unclear about who can qualify and how it applies to current STR services.
Why It Doesn't Work:
This category seems designed for big apartment complexes and may leave out many individual STR operators. It's not clear how this fits into the wider STR market, including those listed online.
The UK Tax System: As An Example Of Model of Clarity
We've conducted our own comparative analysis of Airbnb taxation between the UK and Armenia, highlighting the pros of the UK system in contrast to the Armenian framework. Additionally, for an in-depth understanding of the UK's Airbnb tax regulations, we recommend reading the comprehensive analysis provided by Ernst and Young. You can access the EY report here.
The UK tax system for Airbnb and other short-term rentals (STRs) is well-structured and offers a range of deductible expenses. These deductions are critical for property owners to understand, as they can significantly impact the net taxable income from their rental activities. Here are some key examples and details:
Examples of Deductible Expenses in the UK for STRs:
Mortgage Interest: Property owners can deduct the interest portion of their mortgage payments.
Property Insurance: Costs for building and contents insurance are deductible.
Repairs and Maintenance: Expenses for repairs and general maintenance of the property are deductible. However, costs for improvements (enhancing the property beyond its original state) are not.
Utility Bills: If the owner pays for utilities, these costs can be deducted. This includes gas, electricity, water, and internet services.
Council Tax: If the property owner is responsible for paying the council tax, this can be deducted.
Cleaning and Housekeeping Services: Expenses for cleaning services, including laundry and gardening, if required for the rental, are deductible.
Property Management Fees: Fees paid to agencies or companies for managing the property, including booking management, are deductible.
Advertising Costs: Expenses incurred in advertising the property for rent, including online listing fees, are deductible.
Legal and Professional Fees: Legal fees for renewing a lease (if less than a year) and accountancy fees can be deducted.
Wear and Tear Allowance: Before April 2016, landlords could deduct 10% of their rental profits for wear and tear. However, this has been replaced by the new 'Replacement of Domestic Items Relief', where the cost of replacing furnishings for the first time is not deductible, but subsequent replacements are.
Special Tax Treatments:
Rent-a-Room Scheme: If renting out a furnished room in your main home, you can earn up to £7,500 per year tax-free.
Furnished Holiday Lettings (FHL): Properties that qualify as FHLs have access to certain tax advantages typically available to trading businesses, including capital gains tax reliefs.
One of the key reasons for utilizing a property management company in the STR industry is their expertise in maintaining clear and comprehensive documentation. This is especially crucial when it comes to accounting for deductible expenses, a fundamental aspect of managing tax obligations effectively.
Conclusion and Recommendations
As we navigate the complexities of the STR market, especially in the wake of evolving tax legislations like those in Armenia, it becomes increasingly clear that a well-structured approach, as exemplified by the UK tax system, is crucial. The role of professional property management companies in this landscape cannot be overstated. They not only ensure operational efficiency and compliance with local regulations but also provide indispensable support in managing financial and tax obligations.
Recommendations for Property Owners and Regulators:
For Property Owners:
Engage Professional Management: Collaborate with companies like Hotelise.com for efficient management and accurate financial documentation of your STR properties.
Stay Informed: Keep abreast of local tax regulations and changes. Understanding your obligations can help in better financial planning and compliance.
Leverage Technology: Utilize digital tools and software for tracking expenses, income, and occupancy rates, which are essential for accurate tax reporting.
Seek Expert Advice: Consult with tax professionals or legal advisors, especially when navigating complex tax systems or new legislation.
For Regulators:
Clarity in Legislation: Provide clear, detailed definitions and guidelines for STR taxation, similar to the UK’s approach, to avoid ambiguities and ensure fairness.
Recognize the STR Sector’s Uniqueness: Acknowledge the operational differences between STRs and LTRs, and create tax categories that reflect these nuances.
Encourage Compliance Through Simplification: Simplify tax filing processes and provide incentives for accurate reporting to encourage compliance among property owners.
Collaborate with Industry Experts: Engage with global market leaders like Hotelise.com for insights into best practices and for developing a regulatory framework that supports both economic growth and fair taxation.
Final Thoughts:
The STR industry, as a dynamic force in local economies, merits a thoughtful regulatory approach. Learning from models like the UK's system and utilizing the expertise of professional property management companies can significantly benefit property owners, guests, and the community at large. In Armenia, as in any region adapting its STR regulations, drawing on such established practices promises a more efficient, equitable, and thriving rental market.