Tax Tips for Vacation Rentals
If you’re looking to make extra cash by renting your property out, you’ll need to be clued-up about paying taxes. In most countries around the world, short-term rentals are considered to be a business — and as you’re generating income from your property, the income is therefore taxable.
As the short-term rental industry has been exacerbating problems for long-term renters (landlords or homeowners can make a lot more money from a short-term rental than a long-term rental), local governments all over the United States and the world are clamping down on tax rules for those listing their homes on vacation rental sites. Here are our top tax tips for vacation rentals.
Calculate Your Taxes Ahead of Time
It’s much wiser to calculate your taxes on a weekly or monthly basis than it is to try to work it all out at the end of the tax year. This will save you a massive headache, and also means you can be much more on top of things. If you’re calculating everything at the end of the year, not only will you be hit by a big tax-bill that you might be unprepared for, you also may have forgotten or missed out on a few short-term rental periods. This could lead to a big fine if you end up not declaring all of your short-term rental income. Calculate your taxes with plenty of time ahead to keep the process clear and simple. Tax authorities are out there hunting for those who have not declared the full amount they’ve earned, and there are many places in the world that are now offering harsh penalties for offenders and repeat offenders.
Tax laws vary greatly from place to place. If you’re renting your home or a room in your home for supplemental income, be sure to read-up thoroughly on your local tax laws beforehand.
Many states permit you to rent your home for 14 days or less without declaring tax. Check the rules in the location of your vacation rental. If you rent your home or spare room for more than 14 days in a year, most states require you to pay tax on this money. If you’re only renting your home for say, 10 days during the year, you are often exempt from declaring taxes on this money. The rules also state that, for the income of a short-term rental period of under 14 days to count as untaxable, you have to be present in the property yourself for 14 days of the same tax year, or at least 10 percent of the number of days that you had guests staying.
Get Professional Tax Advice
While it can be expensive to speak to an accountant, it is often money well spent. Speak to a professional to get up-to-date tax advice. Tax rules vary from state to state and even city to city. A professional can help you file your taxes and also let you know about possible tax deductions and business expenses that you can set against your final tax bill. You can also ask a professional to help set you up with tax software, so you can easily keep track of your own taxes using your computer.
Additional Fees to Consider
Not only will you be expected to pay taxes, you’ll also be required to pay fees to the platforms that you list your property on. Some platforms offer a free-to-list model, whereby you only pay a small percentage of the booking value once a property has actually been booked (this is currently 3% for sites such as Airbnb and VRBO), while other platforms require you to pay a fee to list. You can also opt for subscription models through some sites, whereby you pay a fixed annual fee to list your property.
Rental Expense Deducted
In the U.S, if your property is your home and you’re renting it out for a short period of time or you’re renting a room, in many states you can deduct the rental expense of you being elsewhere against your tax payment. There are usually rules on the amount this can be — the rent you’re paying elsewhere typically can’t be more than what you’re receiving in return by listing your home as a short-term rental.
You can often write-off cleaning expenses, maintenance fees, laundry fees, and many other fees against taxes. Sometimes you can write-off home insurance, property insurance, service fees charged by online vacation rental platforms, mortgage interest, utility bills, and repairs made to the property.
This is why it really pays to hire a professional accountant to help you with filing your taxes as they will know what you can and can’t write-off in your particular state.
What to Declare As Income
You’ll have to report your gross income when filing your taxes. This is all the payments you’ve received from your guests before you’ve paid service fees and other costs.
Platforms Withholding Tax
Many rental platforms request taxpayer information from the host as they need to report US income to the IRS. The platforms can often withhold income taxes from your payouts if you don’t give them the correct information. It’s easier to cooperate and give your true information to the rental platforms.
Legally, platforms such as Airbnb, HomeAway, and VRBO, must withhold a full 28% of your rental income if you don’t provide them with a W-9 form. This will cost you, as for most hosts looking to make extra cash, the tax rate on your listings would have been lower than 28% anyway.
Higher Chance of Being Audited
With many destinations around the US and the world, such as Las Vegas and New York, clamping down on the vacation rental industry, there’s a greater chance you may get audited. Stay on top of your taxes to avoid any problems.
Do You Count As Self-Employed?
If you’re renting a room and offering services such as breakfast, lunch or dinner, you would technically count as self-employed. If you’re just handing over the keys and leaving your guests to it, you won’t count as self-employed. This means that if it looks like you’re running a bed & breakfast or something similar, in the eyes of the IRS you are self-employed and required to register as self-employed.