Rentals, Tax Consequences, and the World Equestrian Games

By Stephen Frazier, Staff Member

In 2004, Governor Ernie Fletcher submitted a bid to host the 2010 World Equestrian Games. The two-week event is expected to bring approximately 250,000 international athletes and tourist to Kentucky. Staff Writer, Kentucky To Bid For 2010 World Equestrian Games, July 8, 2004, available at http://www.alltechfeigames.com/news/detail.aspx? id=1116. Experts estimate that the games will have a $90 million economic impact on the state of Kentucky. Id.

One method that citizens of Kentucky are cashing in on the arrival of the World Equestrian Games is by renting their residence during the weeks before, during, and after the games. Depending on the size of the house and location, homes are generating rental income ranging from a couple hundred dollars a night, up to $30,000 for the full duration of the event. See generally World Equestrian Game Housing, http://www.2010weghomes.com/ (last visited Sept. 25, 2010). This seems to be a great method for Kentucky residents to generate additional income; however, homeowners need to be aware of a possible issue with huge tax consequences.

Section 61 of the Federal Taxation Statutes states that “gross income means all income from whatever source derived,” including rents. I.R.S. §61 (West 2008). However, Section 280A of the Federal Taxation Statutes provides a tax loophole of which homeowners must be aware. Section 280A(g) states if a taxpayer uses a dwelling as a residence and the unit is rented for less than 15 days during a taxable year, then the income generated from such use shall not be included in gross income under section 61. I.R.S. §280A (West 2008). The World Equestrian Games start on September 25 and end on October 10. Since the World Games occur for a period of sixteen days, homeowners cannot rent their residence for the entire duration of the event and receive the benefit of section 280A.

Over the next month, citizens of Kentucky will have the opportunity to make thousands of dollars by vacating their homes and renting them to tourists. The World Equestrian Games provide an opportunity for homeowners to generate funds to pay off their mortgage and cover living expenses. However, if homeowners are not aware of section 280A, the World Equestrian Games could result in taxpayers having an increased taxable income and large tax due come April 15th.

World Equestrian Games Bring Tourists (and Transient Tax?)

This post was written by staff member Tanner James.

With the Alltech FEI World Equestrian Games coming to Lexington in September of 2010, masses of spectators will likely descend upon the Commonwealth in record numbers. Local hotels and inns will thrive, but at some point they will almost certainly reach maximum occupancy, and the prospect of cashing in on this problem has come to the attention of local homeowners. Many Lexington residents are willing to rent out their homes to the city’s newest visitors—for a healthy fee, of course. But things may not be so simple.

As of this writing, Lexington officials are engaged in research and deliberation regarding state and municipal laws that may present obstacles to the would-be temporary lessors. Linda Blackford, WEG rentals might face hurdles, LEXINGTON HERALD LEADER, available at http://www.kentucky.com/news/local/story/894703.html. From zoning laws to health department rules, these rentals may be subject to the same legal standards as full-sized hotels. Id. Particularly complex and noteworthy, however, is the potential for tax liability. Id.

Established by the Kentucky Code, there exists a “special transient room tax” that may be levied by an urban-county government upon “all persons, companies, corporations, or other like or similar persons, groups, or organizations doing business as motor courts, motels, hotels, inns, or like or similar accommodations businesses.” Ky. Rev. Stat. Ann. §91A.390(1) (West 2008). Monies collected from this tax are for the benefit of tourist and convention commissions under the theory that hotels, motels, inns, etc. all benefit from the use of this revenue. Lexington v. Motel Developers, Inc., 465 S.W.2d 253, 254 (Ky. 1971).

The amount of the tax is initially restricted to no more than three percent (3%) of the rental price, though additional taxes may be applied dependant upon factors too complicated and numerous to discuss here. Ky. Rev. Stat. Ann. § 91A.390 (West 2008).

This all adds up to substantial source of confusion for those wishing to rent out their homes, as well as for Lexington officials who must research and clarify the issue. Will local homeowners be taxed like hotels? Or, will the state provide for an exemption? The answers to these and related questions stand to have a substantial impact on the atmosphere surrounding the World Equestrian Games.