Summer is quickly approaching, which means weekend getaways for fun in the sun. If you are looking for extra income to fund your relaxation time, you might rent your home to summer travelers while you are out of town. Airbnb, HomeAway, and other similar services make the process of short-term renting much simpler by handling all booking and collecting of payments. However, even with the added simplicity, there are still some important tax implications to consider. With proper planning, you can maximize your extra income and minimize any extra tax liability.
Renting for less than 15 days per year
Good news! If you are only renting out your place a few weekends a year, you may not have to pay any federal tax on income earned. There is no tax on income earned for renting a unit for fewer than 15 days during the year, provided the unit is otherwise used as your residence during that year. Even if the unit is your vacation home, the rule applies if you use the vacation house for yourself 14 days or more during the year, or at least 10% of the total days you rent it to others.
Renting for more than 15 days per year
If you rent your home for 15 days or more during the year, you must report this income on your federal income tax return. If you provide substantial services, like cleaning and changing linens between rentals, then you will include your income and expenses on Schedule C, Profit or Loss from Business, meaning you are subject to self-employment tax on the net income. If you do not provide substantial services, you include the income on Schedule E, Supplemental Income and Loss, which could be subject to net investment income tax.
What tax forms will I receive?
If you are using a booking service like Airbnb or HomeAway, you will receive a 1099-K or 1099-MISC each year. This is a summary of all the income you received over the year. These amounts have been reported to the IRS so it’s important that you include the income on your tax return if you have rented the unit for more than 14 days. These amounts do not include your rental expenses. You will need to organize and report those items to the IRS when you file your return.
What expenses can I deduct?
Proper record keeping and tax planning will ensure you receive the maximum benefit of rental expenses incurred for renting out your home. Listed below are some expenses that may qualify:
Real estate taxes
New linens and towels for guests
Food and drink provided for guests
Marketing and advertising
Some expenses above are limited to just the rental portion, determined by the ratio of days the unit is rented at fair rental to the days the unit is used for any other purpose in the given year.
The key to ensuring reduced tax liability is to keep good records of all rental activity and expenses. Keep detailed notes on days rented versus days used for personal use. The day records are used to calculate deductible rental expenses and to determine if you meet the less than 15-day requirement. This simplifies the process not only for when you or your tax professional are preparing your return, but also protects you if an IRS audit occurs.
State & local considerations
A final important consideration, hosts should check the rules for state and local sales tax and/or hotel occupancy tax to determine any applicability. Even if you meet the less than 15-day requirement, you likely must still pay state and local tax.
The Tax Warriors® at Drucker & Scaccetti can help address your specific situation. We have in-depth experience helping clients plan the short-term rentals of properties. Our highly skilled advisors have decades of experience in real estate and understand the nuances of taxation in various states.