With the growing popularity of Airbnb rental companies and other companies, more and more people are renting out their homes and finding a new set of tax issues that come with it. When you list your home, or a room in your home, for short-term rental through services like Airbnb, FlipKey, HomeAway, VRBO, and more, you can reduce your income tax to a minimum and sometimes eliminate it if you follow some of these helpful tips.
Know the 14 Day Rule
Tax laws are usually full of exceptions, but the 14-day rule, sometimes referred to as the "masters' exception" due to its popularity in Georgia at the annual Master's golf tournament, is most famous for considering renting a home. Under this law, you don't pay tax on the income you receive on short-term rent, provided that:
Rent the property for up to 14 days during the year.
Use the vacation home alone for 14 or more days during the year or at least 10% of the total number of days you rent out to others.
Information On Room Exceptions
If you rent a single room in your house, the 14-day rule applies the same way you rent it. 14-days or less, you don't even have to report your taxable income, but you can't make any deductions either.
Do not fear if you get a letter from the IRS
The rule is quite straightforward: you don't have to report rental income if you follow the 14-day rule. However, thanks to reporting laws, companies like Airbnb, HomeAway, and VRBO can report to the IRS any income you get from short-term rentals.
If, by chance, you don't include the income on your tax return, contact the IRS. Do not panic. You need to prove that your income qualifies for the 14-day exception.
Keep Clean Records Of Rental Periods
Solving your short-term rental tax issues will be much easier if you view it as a business from the beginning and keep accurate records.
If you are renting your home for two weeks or less, keep an accurate record of the days you rented and the days you used the residence. If you are renting for a period longer than the 14 day exception period, specify the dates so that you can properly share your personal and business expenses, such as mortgage interest.
Document All Business Expenses
You have the right to deduct all "normal and necessary" expenses to run your rental business. Think of your rental as a pension. Whether you're buying new towels for your guests, remodeling the room, or putting a bottle of wine on the table for arriving guests, you can deduct these expenses from your rental income.
By keeping clear records and keeping track of all money spent on business, you won't have to look at your credit card statements for proof to the IRS.
Spread interest and mortgage costs if you only rent one room
If you rent a room, rather than the whole house, for more than 14 days, you pay taxes on the rental amount and can afford to pay for business expenses. However, it is impossible to deduct 100% of expenses, such as mortgage interest and property taxes. These should be shared between the personal and commercial use of your residence.
Complete the W-9 Tax Identification Number Form
Airbnb, FlipKey, HomeAway, VRBO, and other similar companies must keep 28% of their rental income if you do not provide a W-9 Form. In most cases, the effective tax rate will be less than 28%.
There is no reason to allow tax authorities to withhold overpayments throughout the year, so please send it to W-9. Once you've done that, the rental company can lower the withholding rate, giving you instant access to the maximum rental income amount.
Deduct the Host-Service or Guest-Service Fees
Airbnb, FlipKey, and other short-term rental companies typically charge a percentage, called a customer service fee, or host service fee, which is deducted from the rental limit paid by customers. When these companies also send you an IRS Form 1099 that reflects your rental income for the year, it includes the amount of the service charge.
If you have rented your house or apartment for more than 14 days per year, you can deduct this tax from your reported rental income. As 100% of the rent was directly related to the rental property, it is possible to deduct the total amount paid.
Know the Applicable Occupancy Rates
Some local and state governments charge short-term rental taxes. They vary widely from jurisdiction to jurisdiction, from the name of the tax (hotel tax in some states, transitional tourist tax in others) to taxes and rules.
In many cases, the host needs to collect occupancy directly from tenants and send the money to tax authorities, but some companies, like Airbnb, collect and send taxes to certain cities and states.
Payment of Taxes on Self-Employment
If you are self-employed, you are expected also to pay self-employment tax and income tax. Self-employment taxes cover Social Security and Medicare taxes on the income you earn while running your business.
When you rent out your home, make reservations, and provide services such as coffee or breakfast, the IRS may treat you as a self-employed person in the vacation rental industry.
