10 tax tips for short-term rental hosts
- Aug 27, 2018 | Jennifer Sokolowsky
Becoming a short-term rental host with platforms such as Airbnb, HomeAway, or VRBO offers real opportunities to create a thriving business that can generate extra income. However, you must be aware that taxes go hand in hand with an income-producing business. For many short-term rental hosts, it may be the first time dealing with many of the tax issues that come with running short-term rentals. Here are 10 helpful tips specifically for hosts on what you need to know about taxes.
This information does not offer a substitute for professional legal or tax advice. If you have questions about your tax liability or concerns about compliance, please consult a qualified legal, tax, or accounting professional.
1. Be aware of your tax responsibilities
Even if you’ve never had experience with the ins and out of short-term rental taxes, you’re still responsible for following the law and fulfilling your tax obligations. It’s up to you to find out what’s required of you and to comply. Do your research, talk to a tax professional, and put a plan in place to take care of tax compliance. Failing to do so can result in trouble with tax authorities from the local to the federal level — which can mean fines, penalties, or legal action — and way more hassle than anyone wants to deal with. The best course of action is to get taxes right from the beginning.
2. Keep good records
One way to do things right from the start is to keep good records. This includes information such as income earned and proof of expenditures that you want to deduct on your tax return. Setting up a good system to keep track of the relevant numbers and transactions will make tax compliance a much smoother process.
3. Understand the difference between income tax and short-term rental lodging tax
If you’re a short-term rental host just starting out, you’re probably more familiar with income taxes than with short-term rental lodging taxes. It’s important to understand the differences and to be aware that you’ll have to manage both kinds of taxes in most cases.
Income taxes are paid by short-term rental hosts to federal and some state governments and are filed once a year. Short-term rental operators pay this tax out of pocket based on their total income, including short-term rental income and other sources of income. The total amount of income that’s taxed can be reduced by deductions of allowed expenses.
Meanwhile, short-term rental lodging taxes are actually paid by guests as a percentage of the cost of their stay. Hosts are required to collect lodging taxes from guests and pass them on to the correct tax authority. Lodging taxes can be required at the state, county, city, or other local level. Most often, the total lodging tax charged to guests is made up of many different taxes from various jurisdictions. These can be sales tax and/or lodging tax, which can also be known as hotel tax, transient occupancy tax, bed tax, tourist tax, and more.
4. Understand the 14-day rule for income tax
The 14-day rule applies to income tax, and it means that if you offer a property for rent for 14 days or fewer in a single year, you don’t owe income tax on that rental income. So, for example, if you only rent out your property once a year for less than two weeks for a particular event, you’re not required to report that income or pay tax on it.
5. Check that you’re using the right income tax form
You’ll have some options for forms to use when you report income from short-term rentals, including Schedule C, Profit or Loss From Business or Schedule E, Supplemental Income and Loss. Which form you use can depend on factors such as the kinds of services that you provide guests. You may want to get professional advice on which form applies to you.
The IRS may consider you a “real estate professional” if you make more than half of your income from real estate-related activities, including short-term rentals, and you spend more than 750 hours a year working on your rentals. Real estate professionals have their own tax reporting forms and processes.
6. Fill out your W-9 form with your short-term rental platform
Online rental platforms such as Airbnb, HomeAway, or VRBO may automatically withhold federal taxes for you unless you fill out a W-9 form. Completing the form allows you to reduce the amount of tax your platform withholds for you so you can get more of your earnings up front.
7. Register for lodging tax in the right jurisdictions
Because lodging taxes are often made up of a variety of different taxes from different jurisdictions, short-term rental hosts must often register and file short-term rental taxes with more than one tax authority. Make sure you’re aware of which jurisdictions govern your rental. You should be able to register via the tax jurisdiction’s website and you may have to pay a fee.
8. Get lodging tax rates right
The total tax rate you charge your guests is often a combination of state and local rates. These rates can and do change, so it’s important to know the latest rate, which you should be able to get from tax authorities. You can also use our lodging tax lookup tool to get the correct tax rates for your exact location.
9. Be aware of which lodging taxes are being collected for you
Some short-term rental platforms, including Airbnb and HomeAway, collect lodging taxes on behalf of their hosts when guests book. However, don’t assume your platform is collecting all lodging taxes for you. None of the platforms collect short-term rental taxes in all locations, and they may not collect for all the jurisdictions in which you’re registered. It’s up to you to be aware of which taxes are being collected on your behalf and to take care of collecting the remaining lodging taxes yourself.
10. File tax returns on time
For federal and state income taxes, you’ll file tax returns once a year. However, for lodging taxes, you may file monthly, quarterly, or even annually, depending on the jurisdiction, your earnings amount, and more.
When you register with a tax authority to collect lodging taxes, you should receive an assigned filing frequency and due dates. Keep in mind that you may be collecting lodging taxes in more than one jurisdiction, and that each jurisdiction may have different deadlines.
Failing to file on time can result in penalties, and in some places, you may even get a discount for filing early or on time, so it pays to know your due dates. MyLodgeTax can prepare and file your lodging tax returns for you to ease your compliance burden.