How to Maximize Your Tax Benefits on Your Vacation Rental Property
Questions and Answers
Increasingly, third-party sites like Airbnb and VRBO have made it easier for individuals to rent out their homes and condos and generate revenue. Given these trends, it’s important to understand both the tax benefits and tax implications before listing your property for lease.
By Elliot Altman, CPA, MST
Are you a current host or considering renting your property on third-party vacation sites?Understand the tax benefits and implications before listing your property.
“If you are a property owner, it is important to understand the tax benefits that come with owning rental properties.”
Whether you are a first-time host or an experienced pro, it’s important to consider the responsibilities as much as the benefits. What follows is a comprehensive tax guide for vacation rental owners that covers everything from how to report your income to the IRS, to what deductions you can claim.
Benefits to renting out a room or vacation property
With the rise of the sharing economy, more and more people are renting out their homes on platforms like Airbnb and VRBO. Third-party sites like these can offer a variety of advantages.
First, you can reach a large audience of potential renters. Both sites have millions of users, so you’ll be able to find people from all over the world who are interested in staying in your rental. Second, you can set your own price and terms. You’re in control of how much you charge and what kind of rental agreement you want to have with your guests. Finally, renting through a third-party site can be a great way to earn extra income. With careful planning, you can make sure that your rental property is profitable.
What is taxable and what is not?
When you’re renting out your property, it’s important to know what income is taxable and what is not. Generally, any money that you receive from renting your property is considered taxable income. This includes rent, cleaning fees, and any other fees that you charge your guests.
However, there are some exceptions. For example, if you rent out your property for less than 14 days per year, the income is not considered taxable. Additionally, if you use your rental property for personal use part of the time, you may only have to pay taxes on the portion of the income that comes from renting it out.
Here are some of the most frequently asked questions related to taxes and your Airbnb and Vrbo rentals.
Do I have to pay taxes on rental income?
If you rent out your vacation home, spare room, or apartment for more than 14 days a year, you are required to pay taxes on the rental income. This includes all income you collect from rent, cleaning fees and any other additional fees.
How much tax will I have to pay?
The exact amount of tax you owe will depend on a number of factors, including the location of your rental property and the amount of income you earn. In most cases, you will be required to pay federal, state, and local taxes on your rental income.
State and local taxes on rental income vary depending on the location of your rental property.
What expenses can I write off?
People who rent out their homes on Airbnb and VRBO can write off a number of expenses on their taxes. These expenses can include the cost of repairs, cleaning, and furnishings. You will need to allocate rental and personal use in order to write off the expenses. In addition, rental property owners can deduct the costs of advertising and paying fees to the rental platforms. However, it is important to keep detailed records of all expenses in order to maximize the tax benefits. For example, receipts for repairs should be kept in order to prove that the expense was incurred. By carefully tracking their expenses, Airbnb and VRBO hosts can ensure that they take advantage of all the available tax benefits.
Do I need to collect occupancy tax?
The answer depends on the laws in your area, but in general, if you’re renting out a room or portion of your home for less than 30 days at a time, you are likely required to collect and remit occupancy taxes.
These taxes, which are also sometimes called lodging taxes or tourism taxes, are typically imposed by state or local governments in order to generate revenue from visitors. They can range from a few percent to over 10% of the rental rate, so it’s important to be aware of the laws in your area before listing your property. (Massachusetts state room occupancy excise tax rate is 5.7%).
One of the benefits to renting your property through a third-party site, is that they may have an automated feature that determines which taxes are applicable for your listing, collects and pays occupancy taxes on your behalf. Always check to see if this setting is available and if you need to opt in for it to be activated.
Am I considered self-employed if I have rental income?
Unlike wages from a job or a business, rental income isn’t considered to be earned income. Instead, it’s considered to be passive income by the IRS, and therefore is not subject to self-employment tax.
Will third-party rental sites provide me with a tax form?
There are a few factors that will determine if you will receive a tax form from your third-party site. The 1099-K form is used to report income from transactions that are processed through a third party. This includes credit card payments, PayPal payments, and other forms of electronic payments. The form will report the total amount of income that you received from Airbnb or VRBO during the year, as well as the total number of transactions.
Third-party sites, such as Airbnb and Vrbo, typically will provide you with form 1099-K if you meet certain thresholds such as:
• Processed more than $20,000 in gross rental income through the platform, and
• Have 200 or more transactions during the year.
Note that these are only general guidelines, and you may still receive a 1099-K form even if you don’t meet both of these criteria.
Maximize Your Tax Benefits on Your Rental Property
If you are a property owner, it is important to understand the tax benefits that come with owning rental properties. It’s important to speak with a tax professional so that you can get the most benefit from your rental properties and ensure that you are taking advantage of all available tax breaks.u
Elliot Altman, CPA, MST is a Senior Manager at the Holyoke based accounting firm, Meyers Brothers Kalicka, P.C.