Short-Term Rentals: A Tax Guide
Offering your home or spare room as a short-term rental on sites like Airbnb and Vrbo has been gaining popularity as a quick way to earn extra cash. But do you know what your tax liability is as a host? Are you getting all your tax deductions? Before you become a short-term rental host, you should consider the following:
The 14-Day Rule
The 14-day rule is the most important for anyone considering renting out a vacation home. Under this rule, you are NOT required to pay tax on income earned from a short-term rental if you rent the property for 14 days or less during the year AND you use the house yourself 14 days or more throughout the year or at least 10% of the total days you rent it out.
Conversely, if you rent your property for more than 14 days, you are required to pay taxes on the money you receive for the use of the property plus any services or extras you add on like cleaning fees or meals. This also means that you can deduct eligible expenses.
Room vs. Entire Property
The 14-day rule applies in the same way whether you rent out a room or the entire property. Fourteen days or less, you don’t have to report the income on your taxes, but you can’t take any deductions either.
If you rent out your room for over 14 days, you must report all rental income however, you cannot deduct 100% of expenses like mortgage interest and property taxes. These expenses must be allocated based on the personal and business use of your residence.
Keep Detailed Records
Just like any business, keeping meticulous records is key to avoiding issues with the IRS. That means keeping careful track of rental days and those days that you used the residence yourself. If you rent for more than the 14-day exception period, make sure you keep track of dates accurately so you can properly divide out personal and business expenses.
Document All Business Expenses
According to the IRS, you can deduct all “ordinary and necessary” expenses to operate your short-term rental business. So, if you buy new sheets for your guests, repaint the bathroom or put out a bottle of wine for incoming guests, you can deduct these expenses from your rental income. Keeping clear records and recording all the money you spend on the business means you won’t have to pore over credit card statements come tax time.
In other words, if your rental looks more like a traditional bed & breakfast, you would need to start paying self-employment tax in addition to your rental tax. Self-employment tax covers Social Security and Medicare contributions for the income you make when you are in business for yourself.
Complete a Form W-9
If you do NOT provide a W-9 form to home share companies like Airbnb, HomeAway, and Vrbo, they must withhold a full 28% of your rental income. In most cases your actual tax rate will be lower than 28%, so don’t let the tax authorities hold onto your overpayment all year. Once you submit your W-9, the rental company can reduce your withholding and you can hold onto more of your rental income.
Deduct Guest Service Fees
Typically, short-term rental companies charge a guest-service fee or a host-service fee, which is a percentage of the total amount a guest pays. If you rent out your property for more than 14 days, you should deduct this fee from your reported rental income.
Learn About Applicable Occupancy Taxes
Occupancy tax – also known as tourist tax, hotel tax, room tax, and lodging tax – is a tax that a visitor is required to pay when they rent a property. Depending on where you live, you may need to collect occupancy tax from your guests.
The rate and rules for occupancy tax vary by country, state, county, and city. Hosts are responsible for collecting the occupancy tax from renters and submitting it to the tax authority. Some companies, like Airbnb and Vrbo will collect and submit taxes for certain cities and states.
Pay Self-Employment Taxes
If your property is used exclusively as a rental, and if you provide additional services for your guests like meals or cleaning services, you may be considered self-employed by the IRS, and therefore subject to self-employment tax.
Renting out a house, room or other property can be a lucrative business. Trust our experienced tax professionals to help you get the most tax benefits from your short-term rental. Call us at (918) 600-2299 or click to partner with us today!