Tax time probably isn’t your favorite time of the year – it’s certainly not mine. If you’ve rented to short-term guests during the year, figuring out your short-term rental taxes can be pretty complicated. These quick tips can help you get started.
Disclaimer: I’m not an accountant or an attorney, nor do I work for the IRS. Although the information in this post is factual as far as I know, it’s only an overview, and I can’t guarantee its accuracy. The rules governing short-term rental taxes can be very complicated and everyone’s situation is different, so I strongly recommend that you consult a tax advisor about tax liabilities for your short-term rental income.
Tax Tip #1: Yes, you have to report your short-term rental income (with one exception)
This point seems like a no-brainer. But many short-term rental hosts aren’t aware that they need to report and pay taxes on short-term rental income for their residence only if they rent it out for more than 14 days in the year.
Here’s the IRS rule:
“…if you use a dwelling unit as a personal residence and rent it for fewer than 15 days….don’t report any of the rental income and don’t deduct any expenses as rental expenses.”
The 14-day rule applies whether you rent out your entire home or just one room in the home. The 14 days do not have to be consecutive. You could rent to Joan and Jason for 3 days, Franco for an overnight, and Pam, Mufeed, and their kids for a week, and still be within the 14-day limit. But renting to your friend’s mother-in-law for 5 days raises the total to 16 days, so you’d have to report all the rental income you received during the year.
Tax Tip #2. Not all the short-term rental income you receive is taxable
Suppose you have rental income of $3000 for the year. You won’t need to pay taxes on the entire amount, only on the “taxable” income: the $3000 less deductions (see Tax Tip #3, Deductions). In other words, if you have $790 worth of allowable deductions, the taxable income would be $2210. But what if you have $3600 of deductions? In that case, you have a loss. You can’t deduct the loss, but you might be able to carry it forward and perhaps use it to reduce your tax liability next year.
To complicate matters further, not all the income you receive from a tenant is taxable. You do not have to include a security deposit in the rental income you report as long as you refund the entire amount of the deposit to the guests. But you might have to report the security deposit if you keep all or part of it as reimbursement for guest-caused damage.
Tax Tip #3. Use allowable deductions to reduce your taxable income
There are lots of expenses involved in renting out your home. Most – but not all – of those expenses are deductible. What’s deductible and what’s not depends on the specific circumstances.
Is your home a residence or a business?
What and how much you can deduct depends partly on whether you live in your home for all or part of the year or whether it’s a rental unit, available for rent year-round. If you have any personal use of a dwelling unit (including a second home) that you rent out, you must divide your expenses between rental use and personal use.
The percent of deductions you can take are not determined solely by the number of days that the home is actually rented out. Instead, your home is considered a rental unit on the days that it is available for rent, whether or not it was actually rented.
Deduct allowable home-related expenses
Depending on the situation, you might be able to deduct a prorated amount of such expenses as:
- Your mortgage interest and taxes
- HOA fees
- Property insurance
- The costs of maintaining and improving the property
- Utilities (gas, electric, water)
- Furnishings and supplies
Deduct direct allowable rental-related expenses
In most cases, you will be able to deduct the full amount of expenses that are directly related to the rental, such as:
- Advertising (e.g., listing site subscriptions, paid ads in newsletters)
- Guest-related cleaning
- Booking fees or commissions
- Fees paid to lawyers, tax professionals, or accountants for work related to the rental
- Reasonable travel expenses necessary to maintain the rental property (e.g., a second home in another state)
What if you pay out more than you take in? Your tax return will reflect a loss, which you might be able to carry forward into the next tax year.
Tax Tip #4. Keep careful, complete, accurate records
There are lots of benefits to renting out your home – but it can also be a lot of work. Even though you might be renting out your primary residence for only a few weeks a year, treat your short-term rental as a business endeavor. As with any business, an essential task is recordkeeping. Do it right, and you’ll be ready as tax day approaches. Neglect it, and you’ll be scrambling to gather receipts and pore through scattered records when April 15 looms.
One way to keep on top of everything is to use logs and spreadsheets to keep careful track of such items as:
- The dates on which the home is rented or vacant, and those on which you use it yourself
- All the income you receive, including damage and security deposits and cleaning fees
- All the expenses you might be able to deduct
- Any depreciable assets you purchase for the rental unit
- Any rental-related improvements you make to the property
- Any losses carried forward from previous years
- Travel expenses related to the rental
In addition to your logs and spreadsheets, keep a file of receipts, including but not limited to:
- Proof of advertising expenses (receipts for listing site subscriptions, copies of ads)
- Receipts showing the date and amount paid for each repair and improvement
- Travel-related receipts annotated to indicate rental-related and personal expenses
- IRS Form 1098 or other form from your mortgage holder that shows the amount of interest you paid
- Property tax receipts
- Cancelled checks or other proof of payment for amounts paid to professionals, such as tax preparers and attorneys, housecleaners, rental managers, workers, and others
- Rental agreements, showing the dates of the rental(s), the amount of the rent, and the amount of security and/or cleaning deposit received
Tax Tip #5. Use the right forms to report your income and deductions
Here’s where it gets complicated. The IRS says:
- For real estate rentals, “You can generally use Form 1040, Schedule E (PDF), Supplemental Income and Loss, to report income and expenses ….If you provide substantial services that are primarily for your tenant’s convenience, report your income and expenses on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship).”
- For personal property rentals, “Report income and expenses related to personal property rentals on Form 1040, Schedule C (PDF) or Form 1040, Schedule C-EZ (PDF), Net Profit from Business (Sole Proprietorship), if you’re in the business of renting personal property. Report income on line 21 and expenses on line 36 of Form 1040 (PDF), U.S. Individual Income Tax Return, if you’re not in the business of renting personal property.”
If you can figure that out yourself, fine. Otherwise, ask your tax advisor for an explanation.
Tax Tip #6. Don’t forget other taxes you might need to pay
Are there any other taxes you might have to pay? The short answer is probably. If the IRS classifies your short-term rental as a business, you might have to pay self-employment taxes (Social Security and Medicare). Your state or local government might levy taxes on short-term rentals. You might have to pay sales tax on the rental income. The good news is that some of these taxes might be deductible from the rental income. Once again, however, only your tax advisor can say.
Tax Tip #7. Educate yourself
The more you know, the easier it will be to figure out your short-term rental taxes correctly, without spending days doing it. The IRS remains the best source for the most accurate information, but as you’ve seen, it can be difficult to interpret. A good place to start is the new IRS Sharing Economy Tax Center.
Short-term rental listing sites seem to be are strangely silent on the topic of taxes on rental income, but Airbnb has a very informative guide called “General guidance on the taxation of rental income.” It’s hard to find on the site, and it’s not much easier to understand than the IRS rules, but you might find it helpful because it focuses specifically on short-term rental income.
A Google search will bring up other somewhat helpful resources. I noticed these two articles on sites offering tax assistance: “10 Tax Tips for Airbnb, HomeAway & VRBO Vacation Rentals” on the TurboTax site and “Taxes in the Vacation Rental Industry” on a site called a site called Alvara MyLodgeTax.
Have you learned anything important about short-term rental taxes that we haven’t mentioned in this post? Have you found any particularly useful resources? Please share with us!