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How to Maximize Your Tax Benefits on Your Vacation Rental Property

By Contributor
Accounting and Tax Planning Special Coverage

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.

Elliot Altman“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.

There Are Some Significant Differences When It Comes to Taxes

By
Accounting and Tax Planning

Employee or Contractor?

By Danielle Fitzpatrick

Taxpayers often ask about the difference between being an independent contractor and an employee. Although it may seem like they both perform similar work, there are some significant differences when it comes to their responsibilities and when filing annual income-tax returns.

Perhaps you are currently working for an employer and are considering becoming a contractor, or maybe you have just graduated college with a degree and are trying to decide which option is best for you. Whichever route you decide to take, it is important to know the differences so that you can plan accordingly.

Differences in Responsibilities

You are considered an employee when the business you work for has the right to direct and control the work you perform. You are given specific instructions on when and where to work, and are often provided training and the necessary equipment needed to perform specific duties. As an employee, you receive regular wages and may be eligible for benefits such as insurance, retirement, vacation, and sick pay.

You are considered a contractor when services are provided for a specific period of time. Rather than being paid a regular wage, you are paid a flat fee for contractual services. As an independent contractor, you are not eligible for benefits or training through the businesses you are performing services for. You are in charge of your own schedule and typically have several clients for which you are providing services.

Differences at Tax Time

One of the biggest differences between being an employee and a contractor is how your income is taxed on your income-tax return. Unfortunately, the difference is often not realized until an individual files their return and is faced with a significant tax burden.

As an employee, your employer pays 50% of your Medicare and Social Security (FICA) taxes. The other 50% is withdrawn from your regular paycheck along with federal and state (if applicable) tax withholdings. If any expenses are incurred and unreimbursed by your employer, the expenses are not deductible for the employee. On an annual basis, you receive a Form W-2, which shows your taxable income along with all taxes that you had withheld throughout the year.

“One of the advantages of being a contractor is that you can deduct expenses you incur in relation to the income you receive. Record keeping is extremely important when becoming self-employed in order to ensure that you are tracking all applicable income and expenses.”

As a contractor, you are considered self-employed (a sole proprietor). You are now responsible for 100% of the FICA taxes, also known as self-employment taxes. No federal or state tax withholdings are withdrawn from the income you receive, and you may be required to make quarterly estimated tax payments. On an annual basis, you receive a Form 1099-MISC showing the gross income you received in excess of $600 for each business you performed services for. All of the income you receive as a contractor is reportable on Schedule C, which is filed with your individual income-tax return, or on a business tax return if you choose to become incorporated.

One of the advantages of being a contractor is that you can deduct expenses you incur in relation to the income you receive. Record keeping is extremely important when becoming self-employed in order to ensure that you are tracking all applicable income and expenses. Expenses that may help offset your income include, but are not limited to, vehicle expenses, travel expenses, supplies, fees paid for continuing education, and the renewal of professional licenses.

Some Examples

Say you are an employee making $25 an hour and working 40 hours a week. For this example, note that nothing is being withheld for benefits. Your paycheck would look like the following:

Weekly Pay ($25 x 40 hrs.) $1,000
Less:
Federal Taxes Withheld       $200
State Taxes Withheld             $50
FICA Taxes Withheld             $77
Total Weekly Pay              $673

Now, say you are a contractor and charge $25 an hour to provide services to three businesses totaling 40 hours for the week. You receive a total of $1,000 for the week. In addition, you purchased $30 in office supplies and drove 250 miles for the week. Your net income for the week would be:

Gross Income             $1,000
Less:
Office Supplies                $30
Mileage Expense           $145
Taxable Net Income    $825

Now you’re thinking, why am I not a contractor? I bring home over $300 more a week! Yes, you bring home more for the week, but you cannot forget that taxes are not being withheld from your income. You will be responsible for paying these taxes on a quarterly basis and/or when you file your tax return.

As an employee, you report $1,000 as taxable wages on your income-tax return, from which federal and state taxes have already been withheld and will hopefully cover your tax liability. As a contractor, you have taxable net income of $825, but you are now responsible for self-employment tax, in addition to regular income tax that you have not yet paid.

Conclusion

So, should you become an independent contractor or an employee? There is no right or wrong answer; each individual needs to make their own decision and determine what will work best for them and their situation. However, whichever route you decide to take, be sure to consult your tax professional for advice to eliminate any potential surprises and ensure that you are prepared when it comes to filing your annual income-tax returns.

Danielle Fitzpatrick, CPA, is a tax manager at Melanson Heath. She is part of the Commercial Services department and is based out of the Greenfield office. Her areas of expertise include individual income taxes and planning, as well as nonprofit taxes. She also works with many businesses, helping with corporate and partnership taxes and planning.

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