Renting out a vacation home through online platforms like Airbnb, HomeAway, and VRBO can be a great way to earn extra income and share your property with travelers worldwide. However, it also comes with some challenges, such as managing bookings, maintaining the property, and dealing with guests’ issues.
Here are 10 tax tips to help you navigate the tax landscape of vacation rentals, save money, avoid mistakes, and maximize your deductions.
See the tax tips:
- Learn About the 14-day Rule
- Know the Difference Between Sales Tax and Lodging Tax
- Keep Track of Your Rental Income and Expenses
- Deduct Your Rental Expenses
- Depreciate Your Vacation Home
- Report Your Rental Income and Expenses on Schedule E
- Pay Your Self-employment Tax if Applicable
- Consider the Tax Implications of Renting to Relatives or Friends
- File and Pay Your State and Local Taxes
- Seek Professional Tax Advice
Are you curious? Continue reading!
1. Learn About the 14-day Rule
You need the 14-day rule as a vacation rental owner. It helps you avoid paying income tax on your rental income if you either rent out your vacation home for 14 days or less during the year or use your vacation home for personal purposes for more than 14 days or 10% of the rental days—whichever is greater.
This helps you earn some tax-free income from your vacation home, but it also has some drawbacks. For instance, you cannot deduct any of your rental expenses, such as mortgage interest, property taxes, and more, if you use the 14-day rule. Also, it only applies to federal income tax and does not affect your state and local tax obligations. Depending on the tax rules in your area, you may still have to collect and remit sales tax and lodging tax on your short-term rentals.
2. Know the Difference Between Sales Tax and Lodging Tax
Another important tax tip for you as a vacation rental owner is to know the difference between sales tax and lodging tax, and how and how different jurisdictions apply them to short-term rentals.
Sales tax is a general tax that applies to the sale of goods and services, including short-term rentals, in most states and some localities. Lodging tax is a specific tax that applies to the rental of accommodations, such as hotels, motels, and vacation homes, in some states and many localities. You can calculate the two as a percentage of the rental price, but the rates and rules may vary depending on the location and jurisdiction of the vacation home.
Don’t think you only have to collect and remit one type of tax, or that they are exempt from both taxes, as this is not always the case. Depending on where you operate your vacation rental, you may have to collect and remit both sales tax and lodging tax, or only one of them, or none of them. Failing to do so can result in fines, penalties, and interest charges.
3. Keep Track of Your Rental Income and Expenses
A key tax tip for vacation rental owners is to keep track of your rental income and expenses throughout the year. This helps you prepare your tax return, claim your deductions, and avoid any errors or audits.
To record and categorize your transactions, you can use some methods or software that are designed for vacation rental owners, such as QuickBooks, Stessa, and Hurdlr.
Another important tip is to separate your personal and business accounts and expenses to avoid mixing them up. This makes it easier for you to track your rental income and expenses, and to prove them to the IRS if it needs it.
4. Deduct Your Rental Expenses
If you rent out your vacation home for more than 14 days a year and use it for personal purposes for less than 14 days or 10% of the rental days, you can deduct your rental expenses from your rental income. This lowers your taxable income and helps you save money on your taxes.
Some examples of common deductible expenses are mortgage interest, property taxes, utilities, repairs, maintenance, advertising, insurance, fees, supplies and travel.
However, there are some rules and limitations for deducting your rental expenses, check them out on the IRS website- https://www.irs.gov/taxtopics/tc414
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5. Depreciate Your Vacation Home
Depreciation is a tax deduction that allows you to reduce your taxable income by spreading the cost of your vacation home over its useful life. This means that you can deduct a portion of the purchase price of your vacation home every year as if it were wearing out over time.
However, depreciating your vacation house may affect your sales taxes. Recapturing depreciation implies reporting the deductions as income and paying greater taxes on them. This may diminish or raise your vacation home sale profit or loss.
6. Report Your Rental Income and Expenses on Schedule E
To report your rental income and expenses on your tax return, you need to use Schedule E of Form 1040, which is the form for reporting income or loss from rental real estate and royalties. You can download Schedule E and its instructions from the IRS website.
7. Pay Your Self-employment Tax if Applicable
Self-employment tax is a tax that covers Social Security and Medicare for individuals who work for themselves, such as freelancers, contractors, or business owners. If you provide substantial services to your guests, such as cleaning, concierge, catering, etc., you may be considered as self-employed and have to pay self-employment tax on your net rental income.
The self-employment tax rate is 15.3%, which consists of 12.4% for Social Security and 2.9% for Medicare. However, you can deduct half of your self-employment tax from your income tax as an adjustment to income. To calculate your self-employment tax, multiply your net rental income by 0.9235, which is the effective rate after the deduction, and then by 0.153, which is the self-employment tax rate.
To report and pay your self-employment tax, use Schedule SE of Form 1040, which is the form for calculating and reporting self-employment tax.
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8. Consider the Tax Implications of Renting to Relatives or Friends
If you rent your vacation home to relatives or friends at below-market rates or for free, you may be in for a tax surprise. The IRS may not consider such rentals as rental activities, but as personal use days, which can affect your tax deductions and income.
If you rent your vacation property to a relative or friend for less than a fair price or for free, the IRS counts those days as personal use days. This implies you cannot deduct rental expenses for those days and must include any rental money in your income tax.
Avoid this tax trap by charging a fair rental price and following the same guidelines as other guests. For the same property, location, and period, charge a stranger Fair rent. You can utilize Airbnb, HomeAway, and VRBO to compare local property rates and set a fair rate. Maintain a documented rental agreement, pay taxes, and record revenue and costs. To deduct rental expenses, treat the rentals as rental activities.
9. File and Pay Your State and Local Taxes
You may have to file and pay state and local taxes on your short-term rental income, such as income, sales, lodging, business, and others. Your vacation home’s state and local governments impose these taxes, which may have different laws and rates than federal taxes.
Your vacation home’s location and jurisdiction may affect state and local tax rates. Some states and localities have higher or lower tax rates, exemptions or thresholds for certain rentals, and varying definitions of short-term rentals. Research and follow the vacation home tax laws in your location.
10. Seek Professional Tax Advice
The tax issues and regulations that affect short-term rentals are complex and diverse, and they may change from year to year. As a vacation rental owner, you may not have the time, knowledge, or resources to keep up with the latest tax laws and rules, and to handle your tax obligations properly and efficiently.
That is why you need to seek professional tax advice from a qualified tax professional or a reputable tax service provider who specializes in vacation rental taxes. It helps you with your specific tax situation, such as determining your tax status and filing requirements, preparing and filing your federal, state, and local tax returns, and many more.
Recap
Ten tax suggestions to improve vacation rental management are The 14-day rule, sales tax vs. lodging tax, keeping track of rental income and expenses, deducting rental expenses, depreciating your vacation home, reporting on Schedule E, paying self-employment tax if applicable, considering the tax implications of renting to relatives or friends, filing and paying state and local taxes, and seeking professional tax advice.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. . For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein.
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