We recently discussed short-term rental taxes with expert Rob Stephens, co-founder and general manager of Avalara MyLodgeTax. Here’s what he told us.
Do all states and local governments charge tax on short-term rentals?
Nearly all locations in the U.S. collect lodging tax on short-term rentals. There are a few exceptions, like Massachusetts, where single-family homes or very small operators are excluded from any lodging tax liability, but that is unusual.
How can I find out what I need to pay?
You need to check with the city, county and state where your rental property is located. There may be a lodging tax at one or multiple levels of government. For instance, Maine has a statewide lodging tax of 9%, with no city or county taxes. However, California does not have a statewide lodging tax—rather, each city or county levies their own transient occupancy tax.
It can get tricky to check with the various agencies. For a shortcut, Avalara MyLodgeTax has created a free tax rate lookup tool that can provide guidance for the tax rate in your locations.
What do I need to know about paying federal taxes on short-term rental income?
There are no federal sales or lodging taxes on short-term rental income, only federal and state income taxes. We handle lodging taxes and are not income tax experts, but rental income generated is certainly reported for federal income tax purposes. However, for income tax you may deduct operating expenses of the short-term rental, which for most people is more than the rent they collect, so they won’t owe income tax.
For lodging taxes, there are no deductions; it’s a tax on total rent collected from the guest.
When it comes to taxes, what are the biggest mistakes that short-term rental hosts make?
There are three primary mistakes we see people making:
- They are unaware of the tax requirements so they haven’t registered and are not collecting taxes from guests.
- They collect the tax (which can be easy to do by listing a tax rate on your VRBO or similar account), but they are not remitting those taxes. This is usually because people don’t know how or even that they need to remit these taxes.
- They register to collect and remit taxes and but they do not file the returns, or they do not file returns correctly or on time. This can trigger an endless string of letters, penalties and hassles with tax agencies.
Collecting and not paying taxes is the worst kind of mistake because there are severe penalties for not paying taxes the taxes you collect from your guests.
What kinds of penalties?
Penalties start at 10% for non-filing or late filing and can be as high as 50%, plus interest. However, if you are audited or caught not paying the appropriate lodging taxes in your area, you will be required to pay the taxes you should have collected from your guests, plus penalties and interest.
For instance, if you generate $30,000 per year on your rental and the lodging tax is 12% (about average), you will owe $3,600 per year in taxes. If a tax agent finds that you are not remitting taxes, they can assess taxes going back years. You might owe $3,600 per year for three years of operations, totaling $10,800. Penalties and interest are added on top of the $10,800, which can easily be another 25% to 50% due over a several-year period.
You can see that the liability for not collecting and remitting lodging taxes can add up to significant amounts quickly. Plus, it’s the guest who actually pays the tax—your obligation is to collect and remit what they pay. You don’t get much benefit to failing to collect and remit these taxes from your guest, because if you don’t there is significant back tax exposure, including penalties plus the taxes you should have collected.
What kinds of records do I need to keep for tax purposes?
You should keep bank statements, sales records (these could be emails or reports from your VRBO or Airbnb account), and rental agreements. You should also maintain a spreadsheet or use a basic accounting system to keep track of your short-term rental revenue and expenses. Make sure to keep invoices supporting all the expenses and sales invoices or booking confirmations for the rent you received.
Do I have to pay taxes on every cent I receive from a guest, including the cleaning fee?
You must pay taxes on all mandatory fees that you charge the guest as a condition of the rental. This typically covers all extra charges, such as cleaning fees, pet fees, credit card fees, etc. Refundable damage or security deposits are not taxable.
I know that hotel bills have a line for taxes. Can I charge my guests for the taxes I have to pay?
Yes. In fact, by law the guest is the one required to pay the tax. As an “operator” – the proprietor of a hotel or rental property – your obligation is to collect the tax from the guest and remit it each month or quarter to the correct agencies. And, if you don’t collect the tax from the guest, you are the one liable.
You should not think of the taxes as part of your income or your expenses. As a host, you receive the rent and the tax you collect from the guest goes to the tax agency. The tax is simply an amount you are required to collect from the guest and then pass on to the government – it is neither income nor expense.
What percentage of the rental income can I expect to pay in taxes?
Lodging taxes are typically 10% to 12% on average, with the rate often escalating in resort and urban markets. The short-term rental tax rate in Chicago is over 21%. High tax rates in big cities are very common. But, as I mentioned above, the guest pays the taxes.
My city defines a short-term rental as 30 days or less. Do I have to pay local and state taxes on income from longer-term rentals?
No. In your case, there would be no lodging taxes due for continuous stays of more than 30 days.
These taxes are designed for short-term rentals. Long-term rentals are exempt. In most locations, less than 30 days is the definition of short-term. In some states, anything less than 90 days is short-term and even as long as six month in markets like Hawaii and Florida.
Editor’s note: Even though you might not have to pay lodging taxes, you might need a business license. It’s a good idea to find out.
I rent out a cottage behind my house but I’m always living in the house when guests are there. Do I have to pay state and/or local taxes?
Generally, lodging tax ordinances are written so that if you charge a guest a fee for an overnight stay you must charge lodging taxes. The type of facility – such as primary home, secondary home, guesthouse, cottage, room, couch, garage or basement – or whether you are present doesn’t matter. The act of charging a fee for overnight accommodation is a taxable transaction. There are some exclusions for this kind of activity, but it’s very rare.
I’m confused about terminology: occupancy tax, transient tax, vacation rental tax, short-term rental tax. Are there differences? Or are these just terms for the same thing?
Yes, they are all basically the same thing. Different cities and states have different names for lodging taxes. For instance, in Florida they are referred to as a “sales tax and tourist development” tax. In California, this would be referred to as a “transient occupancy” tax. In Texas, you would be paying a “hotel occupancy” tax. They are all the same kind of taxes operating under different names.
In what ways does the new tax code impact short-term rental hosts?
I think you are referencing the federal income tax law, which has no impact on lodging taxes. Avalara MyLodgeTax is not an authority on income taxes, and I would defer to an expert better equipped to provide reliable advice on income taxes.
A finance expert for the rapidly growing short-term lodging marketplace, Rob Stephens co-founded Avalara MyLodgeTax (formerly HotSpot Tax) in 2002. The leading provider of tax compliance solutions for the vacation rental industry, Avalara simplifies compliance and manages the licenses and tax filings for thousands of vacation rental owners and managers across the United States. Rob has owned and managed his own vacation rental in Vail, CO since 1999.
What have you learned about your tax liabilities as a short-term rental host? Please share your tips in the Comments or on our Facebook page.