Are Short-Term Rentals Taxable?
To answer the question “are short-term rentals taxable” quickly — yes they are taxable. Renting out a home is an excellent way for someone to earn extra income for a spare room, vacation home, or any unused property. But the answer is in that last sentence: it is a form of income. Since it is a means of personal revenue, hosts are responsible for paying federal tax and, depending on the location, state income tax as well. However, there are some gray areas with some of the regulations, we explore those below.
Fourteen Day Exception
Anyone who lists their property for 14 days or less, does not need to file taxes on their vacation rental income. This short length does not qualify as a legitimate business or income and thus is not taxed. The 14-day law does not change if the days the vacation home is rented are consecutive or intermittently dispersed throughout the year.
Why Don’t Vacation Rental Sites Pay the Taxes?
Many hosts may think that if their property is eligible for taxation, the top vacation rental sites like Airbnb or VRBO will take care of things on their end. This is not the case. Sites do not report any earnings to the IRS. They will also not send hosts any account summary detailing their revenue for the year.
This is actually one of the biggest advantages for vacation rental sites following a “cost by owner” model. Meaning that the hosts, not website representatives, set the price of a night at any given property. This allows platforms to list hosts as 1099 entities. People who are filed as 1099 entities are viewed as payment settlement providers or contract workers. Because of this, 1099 employees are responsible for reporting their own earnings and filing their own taxes.
Hosts are nearly always going to be responsible for their own taxes, but providers like Airbnb may report earnings to the IRS in certain situations. Usually, this will only happen if a host completes 200 or more individual transactions through a single website. This may also occur if a host brings in more than $20,000 worth of revenue in a given year. The $20,000 mark is achieved by a select few properties, usually in larger markets.
Types of Taxes that Hosts May Be Responsible For
Self Employment Tax
Outside of the general taxes mentioned, hosts can be eligible for other taxes. First off, there are potential self-employment taxes. Self-employment taxes are best discussed with a tax professional, as hosts need to file them for a number of different factors like percentage of income, providing additional services like tours, and the average length of stays.
Another key potential tax that hosts should be aware of is lodging tax. Lodging taxes can be tricky because they can be required at a state, county, or city level depending on the rental’s location. Besides the potential local bureaucracy facing hosts, lodging tax is difficult because it is the sole responsibility of the host. Lodging taxes are collected as a part of the price that guests pay for a nightly stay. Hosts are then responsible for transferring that to the proper tax collection authority. So, while lodging taxes are not a requirement at the federal level, it is something to keep an eye on. Lodging tax requirements have a high potential for change as governments may begin to take advantage of the untapped tax revenue in the short-term vacation rental market.
Real Estate Professional Taxes
Real estate professionals have their own filing requirements and tax forms. The IRS, at times, may consider a short-term vacation rental host to be a real estate professional. This most often occurs when someone makes 50% or more of their income on real estate related transactions.
Complete a W-9 Form
Folks in the professional world may think of 1099 and W-9 to be conflicting ways of filing taxes, but in the case of managing a short-term vacation rental business, hosts should fill out both. 1099 is important for reasons outlined above and the W-9 is for potential tax withholdings from the vacation rental platform. Companies like Airbnb, HomeAway, VRBO, etc. may withhold federal taxes unless a host fills out a W-9 form. The completed W-9 can increase the net earnings a host can receive by reducing the amount of taxes taken by the various platforms.
Hopefully, it is clear that vacation rentals are taxable and that sometimes this can put hosts into complicated situations. To make sure they are not liable for any miscommunications or incorrect filings hosts are encouraged to consult with a tax professional, especially hosts who rent consistently throughout the year. Also, sites like MyLodgeTax have popped up with the intention of making vacation rental taxes easy.