With the rising popularity of Airbnb and other vacation rental marketplaces, more and more people are renting their homes and learning about a new set of tax issues that come with it. When you offer your home, or a room in your home, as a short-term rental through services such as Airbnb, HomeAway, VRBO, FlipKey and many others, you minimize the tax on this income—and sometimes eliminate it entirely—if you follow some of these useful tax tips.
Key Takeaways
- Under the 14-day rule, you don't report any of the income you earn from a short-term rental, as long as you rent the property (or room) for no more than 14 days during the year, and you use the property yourself for 14 days or more during the year.
- Even if you meet the 14-day rule, companies like Airbnb, HomeAway, or VRBO may report income for a short-term rental to the IRS on a Form 1099-K. You can add the income to your tax return as additional income, and subtract it as an adjustment to income, noting that it qualifies for the 14-day exception.
- If you rent for longer than the 14-day exception period, detail the dates precisely so you can properly calculate personal and business expenses.
- You can deduct all “ordinary and necessary” expenses to operate your rental business, including guest-service fees unless you use the 14-day rule. In this case, since the income doesn't have to be claimed, the expenses cannot be claimed either.
1. Learn about the 14-day rule
Tax laws are full of exceptions, but the 14-day rule—sometimes called the "Masters exception" because of its popularity in Georgia during the annual Masters golf tournament—is the most important for anyone considering renting out a vacation home. Under this rule, you don't report any of the rental income you earn from the short-term rental, as long as you:
- Rent the property for no more than 14 days during the year AND
- Use the vacation house yourself 14 days or more during the year
If you meet the requirements of the 14-day rule, you do not have to report the income on your taxes and you don't deduct any expenses as a rental expense.
Portland resident Alice Chan earns extra income by renting out her vacation home on the Oregon Coast several times a year. These days, Alice is careful to keep the total rental time under 14 days—a recommended tactic to others.
"The first year, I accepted guests for two one-week stays, plus 10 days over Christmas," Chan says. "I ended up paying hefty taxes and investing a lot of time in trying to figure out my tax deductions and finances. Now, I just stick to the 14-day limit."
2. Learn about exceptions for rooms
If you just rent out one room in your house, the 14-day rule applies in the same way as if you rent out your whole house. Fourteen days or less, you don’t even have to report the income on your taxes, but you cannot take any rental expense deductions either.
3. Don't panic if you get an IRS letter
The rule is simple: you don't have to report rental income if you stay within the 14-day rule. However, because of reporting laws, companies like Airbnb, HomeAway and VRBO may report to the IRS all income you receive from short-term rentals, even if you rent for less than two weeks. If reported, this income will possibly be reported to you and the IRS on a Form 1099-K.
If this happens, and you don't include the income on your tax return, you may hear from the IRS. Don't panic. You'll simply need to prove the income qualifies for the 14-day exception.
4. Keep flawless records of rental periods
You'll have a much easier time with tax issues on your short-term vacation rental if you treat it as a business from the get-go and keep meticulous records.
If you rent out your place for two weeks or less, keep careful track of both rental days and those days you used the residence yourself. If you rent for longer than the 14-day exception period, detail the dates precisely so you can properly divide out personal and business expenses, like mortgage interest.
5. Document all business expenses
You are entitled to deduct all “ordinary and necessary” expenses to operate your rental business. Like the "BnB" in Airbnb, think of your rental as a bed-and-breakfast. If you buy new towels for your guests, repaint the guestroom or put a bottle of wine on the table for incoming guests, you can deduct these expenses from your rental income.
By keeping clear records and recording all money you spend on the business, you won't have to go back through credit card statements for proof for the IRS.
TurboTax Tip:
Be sure to file a W-9 form with your short-term rental company, otherwise it's required to withhold 28% of your rental income for the entire tax year. In most cases, your rental income tax will be less than 28%.
6. Apportion mortgage interest and taxes if you only rent a room
If you rent out a room, rather than the entire house, for over 14 days, you include the income on your taxes and you can take business expenses. However, you can’t deduct 100% of expenses like mortgage interest and property taxeswhen you are renting 100% of the house. These must be apportioned between personal and business use of your residence.
7. Fill out Form W-9 Taxpayer Identification Number
Airbnb, HomeAway, VRBO, FlipKey and similar companies are required to withhold 28% of your rental income if you don't provide them with a W-9 form. In most cases, the tax on your rental income will be less than 28%.
There's no reason to let the tax authorities hold your overpayment all year, so file that W-9. Once you do, the rental company can stop withholding from your income, giving you immediate access to the maximum amount of rental income.
8. Deduct the guest-service or host-service fees
Airbnb, FlipKey and other short-term rental companies usually charge a percentage fee, called a guest-service fee or a host-service fee that is taken off the top of the rent that guests pay. When these companies send you and the IRS a 1099 form reflecting your house rental earnings for the year, it includes the amount of service fees.
If you rented out your home or apartment for more than 14 days in the year, you can and should deduct this fee from your reported rental income. Since 100% of the fee was directly related to the rental use of the property, you can deduct the entire amount paid.
9. Learn about applicable occupancy taxes
Some state and local governments impose occupancy taxes on short-term rentals. These vary widely from one jurisdiction to the next, from the name of the tax—hotel tax in some states, transient lodging tax in others—to the rates and rules.
In many cases, the host is required to collect the occupancy tax directly from renters and submit the money to the tax authority, but some companies, like Airbnb, collect and submit the taxes in certain cities and states.
10. Pay self-employment taxes
When you rent out your home, make bookings and provide amenities or services, like coffee or breakfast, the IRS may treat you as being self-employed in the vacation rental business.
If you are self-employed, you have to pay self-employment taxes, as well as income taxes. Self-employment taxes cover Social Security and Medicare contributions for income you make when you are in business for yourself.
To understand more about tax deductions, visit our Self-Employed Tax Deduction Calculator for Airbnb.
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As a seasoned expert in the field of vacation rental taxation, I bring forth a wealth of knowledge and practical experience to guide you through the complexities of reporting income from short-term rentals. Over the years, I've closely monitored the evolving landscape of platforms like Airbnb, HomeAway, VRBO, and others, adapting my expertise to the dynamic changes in tax regulations.
Let's delve into the key concepts outlined in the provided article:
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The 14-Day Rule:
- This crucial rule exempts individuals from reporting rental income if the property is rented for no more than 14 days during the year, and the property is used personally for 14 days or more during the year. This rule, also known as the "Masters exception," provides a significant tax advantage.
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Exceptions for Rooms:
- If you rent out a single room within your house, the 14-day rule applies similarly. Income from renting for 14 days or less is not reported on taxes, but rental expense deductions are not allowed.
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IRS Reporting by Rental Platforms:
- Companies like Airbnb, HomeAway, and VRBO may report income to the IRS on Form 1099-K, even if it falls within the 14-day exception. It's crucial to keep records and be prepared to prove eligibility for the exception if the IRS questions unreported income.
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Recordkeeping:
- Maintaining meticulous records of rental periods is essential, especially for periods exceeding the 14-day exception. Accurate documentation aids in properly calculating personal and business expenses, including mortgage interest.
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Business Expenses Deduction:
- All "ordinary and necessary" expenses related to operating the rental business are deductible. This includes expenses such as guest-service fees, provided the 14-day rule is not used.
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Form W-9 Submission:
- Filing a W-9 form with the short-term rental company is necessary to prevent a 28% withholding on rental income. This ensures immediate access to the full rental income amount.
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Deducting Service Fees:
- If you rented out your property for more than 14 days, you can deduct the guest-service or host-service fees charged by rental platforms from your reported rental income.
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Occupancy Taxes:
- Some state and local governments impose occupancy taxes on short-term rentals. Hosts may be required to collect and submit these taxes directly, or rental platforms like Airbnb may handle this on behalf of hosts in certain jurisdictions.
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Self-Employment Taxes:
- Engaging in activities like making bookings and providing services can lead the IRS to treat you as self-employed in the vacation rental business. This may result in the obligation to pay self-employment taxes covering Social Security and Medicare contributions.
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Utilizing Tax Tools:
- Leveraging tools like TurboTax, as mentioned in the article, can aid in filing taxes accurately and efficiently, especially for individuals engaged in the vacation rental business. The article recommends filing a W-9 form to avoid unnecessary withholding and emphasizes the deduction of guest-service fees.
In conclusion, navigating the tax implications of short-term rentals requires a comprehensive understanding of rules, exceptions, and documentation. By following these tips and staying informed about tax regulations, individuals can optimize their tax positions while engaging in the growing market of vacation rentals.
