Offering your home or a room in your home as a short-term rental through platforms like Airbnb, VRBO, HomeAway, FlipKey, and many others is a great way to make additional income. However, it’s important to understand some of the complex tax issues related to owning and operating short-term rentals. Here’s what you need to know about short-term rental taxes and how you can keep them to a minimum.
Tax Treatment of Short-Term Rental Properties
The IRS classifies your dwelling unit as a residence (rather than a business) if you use it yourself for personal purposes more than the greater of:
- 14 days per year
- 10% of the total days you rent it to others at a fair rental price
Under this rule, you don’t pay tax on income you earn from the short-term rental, as long as you stay under this threshold. The same rule applies if you rent out one room in your house. Keep in mind that you cannot deduct any rental-related expenses either.
If you rent out your home or apartment for more than 14 days in the year or more than 10% of the total days, you must pay taxes on any income you earn. However, you can deduct all “ordinary and necessary” expenses to operate your rental business. For example, if you buy a new coffee maker for guests, add new carpet in the guestroom, or gift a bottle of wine, you can deduct these expenses from your rental income.
If you rent out just a room, rather than your whole house, for over 14 days or more than 10% of the total days, you’ll pay taxes on the rental amount. Fortunately, you can deduct your business expenses. However, you can’t deduct 100% of expenses like mortgage interest and property taxes. These must be distributed between personal and business use of your residence.
Short-term rental companies also usually charge a guest-service fee or a host-service fee that is taken off the top of the rent that guests pay. These service fees should be listed on your 1099 form. If applicable, you can deduct this fee from your reported rental income. Remember, it’s crucial to keep clear records of your expenses.
You may also be subject to self-employment taxes. Each dollar of net profit is subject to self-employment taxes at an additional 15.3% rate. The 15.3% rate comes from the employee half (7.65%) and the employer half (7.65%) of Social Security and Medicare taxes. But when you’re self-employed, you must contribute to both.
Tax Questions About Your Rental Property? Contact America’s Top Tax Experts
If you’re a savvy investor who needs help with back taxes, you’ll want to work with a trusted tax lawyer to keep as much of your money as possible. Contact US Tax Shield today at (877) 829-3535 for your free no-obligation consultation.
