Dear Weekender,
A global trend of the past decades is the letting of immovable property to third parties via online platforms such as Agoda, Airbnb, Booking.com, etc. And with income comes taxes – and in St. Maarten, there is no exception to the taxation of income derived from immovable properties.
In principle, income derived from immovable properties located in St. Maarten falls under the following sources of income:
- Income from Business Enterprise (active)
- Income from Immovable Property (passive)
If you are receiving income from your rental dwelling or looking forward to, the following might be interesting for you, as I will provide you with the necessary information to take into consideration to evaluate and improve your current or future property rental income position for income tax purposes.
As a main rule, all revenues received from immovable properties located in St. Maarten by an individual must be declared in the personal income tax return. This includes any payment received for the use or occupation of your rental property. If you are not a resident of St. Maarten, but you do receive rental income from an immovable property located in St. Maarten, you are considered a foreign taxpayer for St. Maarten income tax purposes, and the received revenues are therefore subject to income tax.
The scope of the taxable rental income is not limited to ownership – for instance, income derived from subletting immovable property is also deemed a taxable income. The following are examples of immovable properties that are more commonly rented out:
- Villa
- Townhouse
- Apartment
- Condo
- Studio
- Room
- Building
- Land
- Berth
- Parking lot
To determine the tax consequences of receiving rental income as an individual from immovable property, a distinction should be made between ‘active’ rental activities versus ‘passive’ rental activities. Contrary to the assumption of many, the passive letting of an immovable property to third parties is also taxable. Both active and passive rental activities are subject to income tax at the progressive rates of 47.5% at maximum. Although the tax rate for both activities is the same, the taxable base could differ, resulting in a difference in the effective tax burden.
Active rental activity
The St. Maarten income tax legislation does not explicitly outline the term business. However, it is generally acknowledged that for tax purposes, a business is an organization of capital and labour, which aims to make profit by participating in the economic market. Therefore, it must also be reasonable that profits could actually be expected from this activity.
As a criterion for your rental or management activity, to qualify as an active business enterprise, the activity must be of such extent that it goes beyond the boundaries of regular asset management, also the profitability of the activity will be considered. The hours spent on maintenance, administration, financial and contract management duties are crucial to determine the tax status of the rental activity.
Once your rental activity qualifies as a business enterprise, it could be argued that you are entitled to deduct the necessary costs made to keep your rental property in good operating condition. The common expenses that are generally accepted are as follows:
- Depreciation costs
- Interest costs and costs of loans
- Advertising
- Improvement
- Repairs and maintenance
- Utilities
- Broker fees
- Taxes
- Insurance premiums
Please note that business profits made with the sale of your immovable property would also be taxable for personal income tax purposes.
Passive rental activity
Generally, if revenues received from a rental property do not qualify as proceeds of the other sources of income, such as active business enterprise, labour, capital gains or periodical payments, they are automatically deemed to be a passive activity.
In determining the taxable income from this passive activity, the deductible expenses are in essence limited to 35% of the revenues, except interest costs and costs of loans, for example death risk insurance premiums. This implies that the actual costs incurred to keep the rental property operational are not automatically deductible and in fact 65% of the received revenues would be deemed to be taxable income.
Although actual costs and expenses made are not deductible, gains on sale of the immovable property are exempt from income tax.
Active versus Passive
It might seem beneficial for your property rental activity to be deemed as an active business activity, since the actual costs made are deductible. However, business profits made with the rental and sale of your immovable property are subject to income tax, whilst gains on sale from a passive rental activity are exempt from income tax. For the sake of clarity, please note that for the calculation of your taxable income from business rental activities, 100% of the revenues is taxable, contrary to the aforementioned deemed 65% income for the passive rental activity. Therefore, it is not necessarily beneficial for your property rental activity to be deemed an active business activity.
So how your property rental activity qualifies for income tax purposes and what your envisaged short- and long-term plans are could have significant impact on your personal financial situation.
For completeness’ sake, please note that although this column sheds light on the income tax consequences of letting immovable property, it must be taken into account that revenues received with the exploitation of immovable property as such are in principle also subject to Turnover tax, unless it regards long-term rental to individuals’ residents. #knowyourtaxes
Sincerely,
Nicole Echobardo | HBN Law & Tax
