As vacation rental agencies such as Airbnb continue to grow in popularity, a growing number of homeowners are renting out their properties. These short-term rentals bring up a new set of tax issues to understand.
When you rent out your home - or one of the rooms in your home - on a short-term basis, you can minimize or even eliminate income taxes with the right knowledge. Following are 11 tips from Turbo Tax for understanding vacation rental taxes, how to maximize your deductions, and how to keep the hassle and stress of handling these tax implications to a minimum.
1. Understand the Different Rental Scenarios
How often you use your rental property has a significant effect on your vacation rental taxes. The amount of time you spend at the home and how often you choose to rent it out are particularly important when it comes to your vacation rental taxes.
In general, there are three descriptions based on how often you use the property.
- Full-time Rental: The property is occupied by renters for a significant portion of the year
- Short-term Rental: The property is only occupied by renters for short periods, usually less than 14 days, each year
- Hybrid Rental: The property is occupied for the majority of the year by a mix of yourself and renters
2. Understand the 14-day Rule
Vacation rental tax laws are packed with loopholes and exceptions but one in particular, the 14-day rule - also known as the Masters exception due to its popularity during the Master golf tournament in Georgia - is arguably the most crucial rule to consider when renting out a vacation property. Under the 14-day rule, you are not required to pay tax on your short-term rental earnings as long as you meet both of the requirements below:
- Do not rent out the property for more than 14 days over the course of the year
- Use the vacation home for yourself a minimum of 14 days during the year or a minimum of 10% of the days it is rented out to others
Sticking to a 14-day rental limit can save you a great deal of hassle and time and lead to significant savings on taxes.
3. Understand Room Exceptions
Even if you choose to only rent a single room in your house, the 14-day rule still applies. Just as with an entire home, a single room can be rented out for 14 days or less without requiring the owner to report the income on taxes (this also means no deductions can be taken).
4. Do Not Panic If You Receive a Letter From the IRS
Even if you abide by the 14-day rule and do not report any rental income, some rental agencies, such as Airbnb, may still report any income you acquire to the IRS. If you did not include the income on your tax return but the IRS was notified of income, you may be contacted by them. In this case, do not panic. You will simply need to prove to the IRS that your income was earned according to the 14-day exception.
5. Keep Detailed Rental Records
Maintaining meticulous records and treating your rental as a business ensures that you will experience far less hassle during tax season. If you choose to rent out your property for 14 days or less, keep a clear record of the dates as well as any days you used the rental yourself. If you rent the property more than 14 days per year, keep a precise record of the dates so you can properly evaluate business and personal expenses.
6. Keep Track of Any Business Expenses
Any required business expenses are eligible to be deducted from taxes since they are necessary for operating your rental business. It can be helpful to view your property as a bed and breakfast.
If you purchase new linens or towels, replace the carpet, set out a bottle of wine, or repaint the room, these expenses can be deducted from the income you earn on the rental. Keeping precise records of how much you spend on business spendings will eliminate the need to sort through credit card statements to prove your expenses to the IRS.
7. Room Only Rentals: Taxes and Apportion Mortgage Interest
If you only rent a single room, as opposed to an entire house, for a period greater than 14 days, you are required to pay taxes on the rental amount. You are also allowed to take business expenses.
Certain expenses such as mortgage interest and property taxes are not allowed to be deducted. These are required to be divided appropriately between business and personal use of your property.
8. Be Sure to Fill out the W-9 Form
If you do not fill out a W-9 form, rental agencies such as Airbnb are required to withhold a large portion, 28 percent, of your rental income. In the majority of cases, owners will have a tax rate lower than this percentage.
It is important to file the W-9 form rather than allow tax authorities to withhold your overpayment for the entire year. Upon completing the form, the rental agency can lower the percentage of earnings they withhold. This provides you with immediate access to the highest possible amount of your rental income.
9. Deduct Guest-Service or Host-Service Fees
In addition to the rent already paid by guests, short-term rental agencies also charge a host service or guest service fee. At the end of the year, these agencies will send you a 1099 form that includes these additional service fees.
If your property was rented out for longer than 14 days during the year, these fees should be deducted from your total rental income since the entire fee was directly linked to the rental use of the property.
10. Research Applicable Occupancy Taxes
Occupancy taxes are imposed on short-term rentals by certain states and local governments. These taxes vary significantly between different jurisdictions.
The majority of cases require the host to collect occupancy tax from the renters and submit this money to the designated tax authority. However, a few companies, including Airbnb, handle the collection of occupancy taxes in certain locations.
11. Cover Self-Employment Taxes
The IRS will likely consider you self-employed if you are renting out your home, scheduling the bookings, and providing amenities. Being self-employed means you are responsible for paying self-employment taxes in addition to income taxes. These self-employment taxes serve to cover Medicare and Social Security contributions since you are running your own business.
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