Airbnb Taxes: The Ultimate Guide

Understanding all the relevant regulations and tax rules when running an Airbnb or vacation rental can be overwhelming. However, it’s increasingly important to ensure that you are fully compliant with any laws for your area at the city and state level.

As the vacation rental market matures, local governments and tax collection authorities are getting wiser to how much money is being made by hosts and striving to ensure they get their cut. Hotel companies are also lobbying for more compliance to ensure they aren’t put at an unfair advantage when they pay their lodging taxes.

Between the increasing pressure on local governments to crack down on party houses and other ‘bad actors’ in their vacation rental communities and the rapid growth of vacation rental market supply and demand it is likely there will be plenty more regulations introduced.

The best advice we can give you is to make sure you know the rules for your property back-to-front, and ensure you’re licensed and paying taxes, or you could be liable for fines and/or removal from vacation rental marketplaces like Airbnb. That would be a good way to destroy your vacation rental empire before it’s even got started.

With that in mind, we’ve compiled an in-depth guide on every aspect of vacation rental and Airbnb regulations and taxes, including looking at the specific rules in some vacation rental hotspots.

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The Most Common Vacation Rental Laws & Regulations

Vacation rentals are a great way to earn money. Whether looking to generate extra income on the side or finance the costs of owning a second home, the vacation rental industry is booming. Vacation rental industry platforms like Airbnb and Vrbo have millions of listings combined in a market worth over $100 billion.

The popularity of short-term rentals has changed the way people vacation, but not without ruffling some feathers. Neighboring residents report horror stories of short-term renters who play loud music and party while on vacation. Meanwhile, the competition of vacation homes has threatened the traditional hotel industry.

Business owners can often charge more money for vacationers than long-term tenants, and critics argue that short-term rentals take badly-needed apartments and homes off the market for local permanent residency.

Complaints from local residents and hotel property management prompted cities to start cracking down and pass laws that regulate short-term rentals. Make no mistake: violation of such laws can be costly. The Miami city council, for example, imposes fines starting at $20,000 for renting out illegal vacation homes.

Not every city takes such drastic measures to regulate short-term rentals. Vacation rental regulations vary by municipality, state, and country. To make things even more confusing, laws change constantly. Vacation rental managers should make themselves aware of some of the most common rental laws and regulations in order to avoid major fines and penalties.

Bans on Temporary or Non-traditional Rentals

A vacation rental property doesn’t necessarily have to mean a permanent home. Nontraditional short-term rentals like RVs and trailers have become increasingly popular. However, if you plan on renting out your RV or trailer in Los Angeles anytime soon, think again. As of December 2018, the LA city council adopted new rules which ban all temporary and “non-residential” structures such as tents, trailers, and RVs. So no more airstream rentals in Venice Beach.

Rental Period Limitations

The LA city council didn’t stop with banning non-residential structures in the recent short-term rental regulations. Property management should also note that LA now limits hosts to renting their residences for no more than 120 days per year. You can get around this limitation however, but you will need to apply for special permission and a business license of this kind will require paying $89 per year in extra fees.

Los Angeles isn’t the only city cracking down of course. The city of Miami also passed legislation that limits short-term rentals to 120 days. Because a large percentage of Miami Beach hosts rent out their property on a full-time basis, these limitations could have a major negative impact for rental owners who rely on their vacation homes to make ends meet.

As of January 2019, vacation rental regulations in Amsterdam also changed. Whereas before, rental owners could host for up to 60 nights, a new law has dropped that count in half to 30 days. The good news, though, is that this time period limitation only applies to renting out an entire apartment or home. Hosts who rent out a room where they also stay can workaround the night counts.

Number of Guests

Do you have a string of large vacation rooms perfect for families or group vacations? You may want to think again as some city councils are taking a stand and limiting the number of guests allowed in a vacation rental.

Starting in January 2019, Amsterdam will limit the number of guests hosted in each property to four adults at a time. That means Amsterdammers won’t have the ability to welcome large groups in town celebrating a bachelorette party or stag do. To keep track and regulate short-term guests, the government requires hosts to register guests with the city council.

Strict Bans on Short-Term Rentals

New York City takes an even stricter approach. New York Governor Andrew Cuomo signed a law that completely bans vacation rentals on home sharing sites. If you plan to host guests at your vacation rental in New York, you cannot rent out an entire apartment or home to visitors for under 30 days, even if you own the building. NYC law does allow short-term rentals only if you, the host, are present and staying together in a “common household”. In other words, a private room is the only type of short-term rental approved in New York.

Many European cities have also started to regulate short-term rentals. Paris, Barcelona, and Palma in Majorca, Spain have some of the strictest short term rental regulations. Paris represents one of the largest markets worldwide for vacation rental listings. City council authorities in Paris have rules in place that require hosts to register their rental property with the town hall. Those who earn over a certain amount each year may also need to pay income tax on the rental earnings.

How To Stay Within the Law for Short-Term Rentals

The moral of the story? When it comes to short-term rental regulations, the laws can change and vary greatly from place to place. In short, we recommend that vacation rental managers check a few things before hosting guests.

  • Check the local vacation rental regulations in regards to your city, state, and country.
  • Does the law require property management to register with the city council in order to accept short-term guests?
  • Do rental owners have a limit on the number of guests per rental or the length of stay?
  • Do rental owners need to obtain a business license or pay a fee to host guests?
  • Do you, as the owner of the property, need to be living in the home and share a common area with guests in order to rent out a room for a short-term period?
  • Are business owners permitted to advertise short term rentals on vacation listing or home sharing sites?
  • What kind of penalties could you face for violating short term rental regulations?

To avoid stress and fees, make sure to stay informed about local regulations on vacation homes. You could save yourself thousands in fines, ensure a profitable business, and stay on good terms with your neighbors and community members.

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Does An Airbnb Count As A Short Term Rental?

You’re thinking of renting your property or spare room but aren’t sure if listing on Airbnb or other vacation rental distribution sites counts as a short-term rental. Here at AllTheRooms Analytics, we’ve taken a look at the definition of a ‘short-term’ rental, as well as case studies of cities around the world, and why short-term rentals are so popular. So, is Airbnb for short-term rentals? Here’s what we know.

Definition of a Short-Term Rental

Generally, in the travel industry, a short-term rental is considered to be a property that is rented out for three months or less. Properties rented for longer than three months are normally considered to be long-term rentals. There’s a high demand for short-term rentals in cities all around the world, as travelers want a cheaper and more local experience — which is something short-term rentals can provide.

Airbnb is mainly used for short-term rentals, with a high demographic of young travelers and business travelers looking for a place to stay for a week or less. It is much more expensive to rent long term through Airbnb, so generally speaking, Airbnb is regarded as a short-term rental platform.

Exacerbating The Long-Term Rental Market

Cities all around the world have been clamping down on the short-term rental industry, including the likes of New York, Toronto, Paris, and London. Since the arrival of vacation rental platforms such as Airbnb, cities that are popular tourist destinations have found it increasingly difficult to control rent prices for locals. This is because if you’re a landlord, you can make a lot more money by renting short-term than you can do by renting long-term — and many are jumping on the Airbnb bandwagon to do so. As a result, cities around the world have been imposing their own rules and regulations to help clamp down on the effects of the booming short-term rental industry.

New York City Case Study

To take New York as an example, a short-term rental is defined as anything less than 30 days.

There’s a really high demand for short-term rentals in NYC, as tourists want to stay in authentic New York apartments and get a glimpse of what life could be like as a local. Hotels in New York City are notoriously expensive — and staying in an Airbnb can be significantly cheaper. As a result of the demand, the rental industry has been aggravated and laws have been put in place to help protect local residents.

New York imposes a strict 30-day rule, whereby city laws dictate that it is illegal to rent an apartment, condo, or a co-op for a period of fewer than 30 days. The only exception is if the owner is also present during the short-term rental period. This law is a regulation imposed on apartments, condos, and co-ops that are in buildings with three or more residential units, which is known as ‘multiple dwelling’ in state law. What this means is that New Yorkers can be present in their apartment during ‘short-term’ stays (anything less than 30 days), but the downside is that the tenant, or owner, has to be present during the guests’ stay.

Singapore Case Study

Singapore has even stricter laws on Airbnb and the short-term rental industry. In Singapore, short-term rentals are illegal. Airbnb and other home rental platforms have been pushing to change the regulations for years, however, they have been unsuccessful. In Singapore, there’s a minimum stay of three months. It’s strictly enforced, and very hard to find short-term rentals through legal channels.

Taxing Short-Term Rentals

As there are rules and regulations surrounding short-term rentals, it’s normal for the homeowner or tenant listing the property to have to pay tax on Airbnb and short-term rentals.

Why Are Short-Term Rentals So Popular?

Privacy

One of the best things about staying in an Airbnb or vacation rental is they offer a lot more privacy than a hotel. By staying in an Airbnb, guests don’t have to stick to the strict rules of a hotel. Guests can come and go as they please, they don’t have to greet hotel staff or make small talk, and they can have the full privacy of their own space.

Airbnb rentals have private common areas, such as lounges, patios, terraces, kitchens, and gardens, which mean you can really spread out and feel like you’re staying in your very own ‘home from home’. You’ll have total privacy and if want to stay up late making memories with friends or family members, you can do so without being interrupted by hotel staff and asked to leave the lobby area or to keep the noise down. Many travelers feel this kind of private experience makes some of the best, lasting memories.

‘Home From Home’

There’s nothing quite like feeling you’re at home, even when you’re thousands of miles away. While hotels, apart-studios, and hostels often look sleek and well-designed, they can feel clinical or sterile and lack that something special you find in a private home rental.

Feel Like a Local

One of the best things about staying in a short-term rental is that guests can see the destination through the eyes of a local. They can also stay in more local neighborhoods, get to know the nearby shops and cafes, and get a feel for what it would be like to live there. This is one of the reasons many travelers opt to stay in an Airbnb. From staying in a charming Parisian flat, through to a cozy cabin in Canada, short-term rentals are a much more special experience than being in a hotel.

Enjoy the Whole Space of a Rental

Vacation rentals generally offer much more space than a hotel and are much more economical. If you’re going on vacation with your family, you can make significant savings by staying in a short-term rental.

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Cities With The Most Lenient Airbnb Regulations

Major cities all around the world are facing new challenges with the rise of short-term vacation rental platforms and the impact this has on the local community. While short-term vacation rentals are great for travelers (they are often substantially cheaper than staying in a hotel and offer more space and privacy), short-term rentals are also contributing to a long-term rental crisis that’s happening in many major cities. This is because landlords have realized they can make a lot more money by offering their home to tourists for short-term rentals, as opposed to renting long-term to residents.

In turn, the rise in short-term rentals is causing housing shortages, and driving up the price of rent for locals; to the extent that many cities in the world have clamped down with strict laws — New York City, Madrid, and Singapore being some of the strictest.

While there are many major cities tightening regulations, there are other cities that still, at present, offer a much more relaxed take on short-term rentals. Here are some of the more short-term-rental-friendly cities:

London, U.K

Currently, for a city as popular as London, its short-term rental regulations appear quite loose. In London, a homeowner or long-term renter can rent or sublet their home for 90 days of the calendar year without needing a permit. If a homeowner wishes to short-term let their home for more than 90 days, they can do so with a permit from the council. Meanwhile, if a long-term renter wishes to sublet their home, they can do so with the permission of their landlord.

Paris, France

Under French law, homeowners in Paris can rent out their homes on short-term rental platforms for up to 120 days in a year. Although there is still a restriction, this is much more relaxed than somewhere like New York City, where short-term rentals for periods of under 30 days are completely illegal.

In Paris, if a homeowner wishes to list their property, their advertisements on online platforms must include a registration number to track how many days the property is being rented out for. There’s a high fine for repeat offenders who rent their home for more than 120 days a year.

Tokyo, Japan

For many tourists traveling to Tokyo, one of the biggest challenges is finding decently priced accommodation as hotels in the city are often very expensive. Over the past few years, Airbnbs and short-term rental platforms have become very popular alternatives. As of new regulations in June 2018, homeowners in Tokyo are allowed to rent their homes for a maximum of 180 days a calendar year — which is a lot of time compared to other top cities around the world. If we compare this with Singapore, where short-term rentals of anything below three months are completely illegal — Tokyo’s policy appears to be much more lenient. In Tokyo, short-term rental hosts must register their homes with the government and place their registration number on their listing.

Rome, Italy

Rome has very relaxed Airbnb laws, especially for a capital city. There’s no cap on how many days a homeowner can rent their home for, but if they’re renting a home as a short-term rental for more than 30 days, the homeowner has to pay a different type of tax. The first 30 days are at a lower tax rate, essentially functioning as a tax break.

Los Angeles, USA

Even with recent restrictions put in place, Los Angeles still has a fairly flexible Airbnb and short-term rental policy. In Los Angeles, hosts must register and pay an $89 fee to the city. A property can be rented for 120 days annually as a short-term rental here. To compare this to other US cities, LA is far more easy-going with short-term rentals; for example, homeowners in Santa Monica have to be living and present at the property during a short-term stay, while Charleston has strict rules based on the historical importance of a house.

Sydney, Australia

Under new planning laws to be introduced in the coming months, Sydney will have a 180-day cap on Airbnb and short-term listings. As the most popular city to travel to Australia, the rules seem fairly decent and allow homeowners to capitalize on the city’s tourism industry and make some extra money.

Montreal, Canada

In Montreal, if a homeowner wishes to rent their home as a short-term rental for over 30 days they can do so, however, they need to apply for a permit, or classification certificate, from classification certificate from Tourisme Québec.

Toronto, Canada

In Toronto, a homeowner can rent their whole home if the owner or tenant is away for a maximum of 180 nights per year. This means that for 185 nights a calendar year, the property can be used as a short-term rental. Short-term rentals, defined as a stay of 28 days or less, are permitted across the whole city, and there are no limits on the style of house that is allowed to host. The only things locals have to do is register their property as a short-term rental with the city of Toronto and pay a $50 fee.

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Cities With The Strictest Airbnb Regulations

So, you want to make a bit of extra cash by renting your property but aren’t sure about the legality of the short-term rental industry. In most cities and destinations around the world, short-term rentals are considered to be businesses, as they are making the property owner, or landlord, money.

For many destinations, the short-term rental industry is exacerbating problems in the long-term rental industry, as landlords or homeowners can make better money from a short-term rental than they can by renting to long term residents. From the rules in different cities around the world, through to the penalties of operating an illegal short-term rental business, here’s the lowdown on short-term rentals and to what degree they are considered a business.

Extra Money

Short-term rentals are a great way of making extra money — and just by renting your property for a few nights in a month, you can make more than if you were to rent long-term. This is primarily why landlords and homeowners are opting to list their properties on short-term rental sites, such as Airbnb, HomeAway, and VRBO, as they can make much more money. However, short-term rentals are causing a lot of problems for locals looking to rent for reasonable prices, and it’s driving huge inflation in the rental market.

The extra money you can make from renting your home is considered a business in most countries. And many countries, therefore, require that the money is registered, accounted for, and taxed. Every destination is handling this differently, with some offering a ‘grace’ period whereby you can rent your home for a limited amount of time, without it counting as a business, and others destinations count any period of short-term rental as taxable money.

Demand

A large percentage of tourists traveling to top destinations want to stay in short-term vacation rentals, as opposed to hotels. This is because vacation rentals can work out a lot cheaper, they feel more like staying in a ‘home from home’, they have more privacy, and provide a more local experience. Many homeowners and landlords are stepping in to soak up the demand.

Clamping Down

Cities and destinations all around the world have been clamping down on the short-term rental industry as it becomes increasingly difficult to control inflation for locals. Since the arrival of vacation rental sites such as Airbnb and VRBO, popular tourist destinations have been under pressure to implement strict restrictions on the short-term rental market.

Short-Term Rental Laws Around the World

Cities around the world are handling the short-term rental industry in different ways. We’ve taken a look at Hawaii, Toronto, Singapore, and New York:

Hawaii

To take Hawaii as an example, recently lawmakers in Honolulu passed legislation to make sure that the state is benefitting from Hawaii’s flourishing short-term vacation rental industry. Honolulu City Council passed tax-raising legislation whereby rental platforms are now responsible for collecting taxes on behalf of the homeowners listing their properties. Meanwhile, in other destinations around the world, the homeowner that is listing their property can be responsible for paying taxes, and many cities are requiring homeowners to have a short-term rental license if they wish to list their property.

Toronto

If we look at Toronto as a second example, the Canadian press recently ran several stories on the fact that Toronto has announced a series of proposed regulations for short-term rentals. A short-term rental will be defined as a period of fewer than 28 days and short-term rentals will only be permitted in primary residences, which means hosts are only allowed to list one property for short-term rental. This means that landlords and homeowners who own multiple properties cannot rent a second property (or further properties) for a ‘short-term’ period. There are also proposed rules that a homeowner can only rent their property as a short-term rental for 180 days in a calendar year in total. Income gained from the short-term rental is considered rental income by the Canada Revenue Agency and therefore must be taxed like any other rental income. So for the city council in Toronto, they really see short-term rental as a business.

Singapore

In Singapore, it’s illegal to list properties for a rental period of fewer than three months. These strict regulations are imposed to stop people from operating illegal businesses in the short-term vacation rental industry. As a result, it’s almost impossible to operate a short-term rental business in Singapore.

New York City

Meanwhile, in New York City, it’s illegal to rent an apartment or condo there for less than 30 days, with very few exceptions to this rule, so it’s difficult to even operate a short-term rental business. For rental periods that are longer than 30 days, the rate of tax depends on a variety of factors.

Operating Illegally

With many people continuing to list their property regardless of the rules, cities are clamping down on those that are running an illegal short-term rental business through Airbnb and similar vacation rental platforms. For many homeowners and landlords, the risk of being caught is worth the amount of money that you can make through short-term rentals. Many people also look for loopholes or list on Facebook or platforms such as Craigslist that aren’t regulated to the same degree as platforms like Airbnb and HomeAway. There are plenty of stories in the news about people that have violated short-term rental laws, and been operating a business illegally. Do not be one of these people — always stick to legal channels.

Penalties

Every city in the world is handling the short-term rental market in a different way, however, something most destinations have in common is high penalties including huge fees and the chance of a jail term. In San Francisco, for example, the fine is $484 dollars per day if you’re operating an illegal short-term rental. For repeat offenders in many cities, the penalty is a jail term.

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Can A Vacation Home Be Used In A 1031 Exchange?

Unless a property owner works as a professional accountant, understanding tax code and all the forms involved with property taxes can feel like a bad dream. Knowing the ins and outs of taxes for a vacation property might even feel a bit nightmarish. Especially when it comes to section 1031 of property taxes.

A 1031 exchange just means exchanging one income property for another one. There are a few benefits to exchanging investment properties, but first, a property owner must qualify for a 1031 exchange. Even during this first step, there is some confusion among property owners, mainly because there is a variety of opinions on these “property swaps”.

When done properly, though, it is entirely possible to use a 1031 exchange for selling and buying – or should we say swapping – a vacation home. There are a lot of grey areas with this type of property exchange, so read about the specific details below.

Basics of the 1031 Exchange Procedure

When reading the official documentation from the Internal Revenue Service on 1031 exchanging, there is very little clarity on the procedure. This is made obvious through this IRS statement:

“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”

This statement basically just means that an investor can sell a property and reinvest the earnings into a new property. In the process, all capital gains taxes will be deferred. But the process isn’t as easy as selling, buying, and deferring. There are very specific procedures involved, which is why getting expert tax advice is highly recommended.

Benefits of a 1031 Exchange for a Vacation Home

The obvious benefit of the 1031 exchange treatment for a vacation home is the deferred taxes. For a property owner qualifying for one, it is possible to acquire a new home and defer all taxes on the sale. Taxes won’t need to be paid until the property is sold, hopefully, many years later. The best part of all is that there is no limit on the number of exchanges that can be made.

This means that as soon as a property owner is ready to call it quits on the current vacation home, another exchange can be made for a replacement property. One might compare this to trading in a car after the lease is up. Sometimes all an individual needs is a change in scenery, and a 1031 exchange allows for this – without all the tax hassles that are normally involved with property investments.

An Example of a Vacation Home 1031 Exchange

Laying out the step by step procedure for undergoing a 1031 exchange would be too difficult, mainly since every homeowner’s situation is different. To help understand the process a bit better, here is an example of how a real estate investment would look like with or without a 1031 exchange:

A real estate investor has $400,000 to gain in addition to $400,000 in net proceeds after closing on a property. After the closing date, the tax liability adds up to $140,000 once all combined taxes are tallied up. These taxes include depreciation recapture, net investment income tax, and federal/state capital gain. After all the taxes have been paid, only $260,000 remains in net equity for another property investment.

Then, with the 25% down payment on a new mortgage that comes with a loan-to-value ratio of 75%, it would be possible to buy a replacement property valuing $1,040,000. However, when a 1031 exchange is filed for reinvesting, the entire $400,000 could be used for a property purchase (instead of just $240,000). This means that the new property could have a higher value of $1.6 million.

Who is Eligible for a Vacation Home 1031 Exchange?

The main requirement for a 1031 exchange is that the exchange is from one investment property to the other. Technically, a vacation home can almost always be considered an investment, no matter if it is being rented or it is meant to be used after retirement. But it takes more than just calling the property a “vacation home” for the IRS to consider these properties investments.

The first case for 1031 eligibility would be for a property owner to rent out the vacation home for an amount of time greater than 14 days per year. Another viable scenario would be for the owner to reside in the property for less than 14 days per year. If a property owner does not meet either of these requirements, all is not lost.

Even if the home is not considered an investment property right now, that doesn’t mean it can’t be transformed into an investment property in the future. In other words, if a property owner wishes to complete a 1031 exchange and trade in the old for the new, there are a few options. It is up to the property owner to decide which route is best.

The owner can either quickly turn the unit into a rental property and start vacation home marketing in order to start booking it out to guests. This will require some work and it certainly isn’t in the cards for every vacation homeowner. The other option is to leave the home vacant for most of the year and only reside in it for 14 days or less.

This means that the IRS will no longer consider it a primary residence for personal purposes. Now, it can officially be called an “investment property” and is eligible for a 1031 exchange. All in all, using a 1031 exchange is an amazing way to get a change of scenery without paying the absurd taxes that typically come along with property investment. It also allows for a higher investment amount, which in turn can lead to a more lucrative investment in the long run.

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Can A Vacation Home Be A Primary Residence?

For property owners with 2+ homes, it is more than likely that one serves as a primary home and another as a real estate investment. Earning a rental income is one of the main reasons for buying a second home. Investing in a vacation home can be quite lucrative if chosen to rent it out, and it might even turn into a full-time passive income.

Technically, though, as soon as someone starts renting out a second home, it is now considered an investment property. Since this property is meant to make money, it can no longer be considered a primary residence or even a second home. Even so, there’s very little question about whether or not a second home should be rented out if making some extra cash is on the agenda.

The only potential turn off – other than the work involved – is filing the yearly tax return. Property taxes for an investment property and even a second home are a completely different entity from residential property taxes. Not wanting to deal with mortgage insurance and tax complications is a major reason to keep the second home as-is, rather than use it to make rental income.

But what about calling a vacation home a primary residence, and is this even possible? Not only is it possible, but labeling a vacation property as a primary home might just be the smartest financial decision ever.

Primary Residence vs Second Home vs Investment Property

Before deciding on whether or not to deem vacation home as a primary residence, it is important to understand the differences between them. Not only that, understanding what it means to own an investment property is also a must.

What is a Primary Residence?

In short, a primary residence is a place to call home. It is where someone will most likely spend the majority of their time, quite possibly all of it. In terms of receiving a mortgage loan, a primary residence requires the lowest down payment of all home types. Some mortgage rates for purchasing a primary residence require as little as a 3% down payment.

The reason for this is because home loan lenders see primary residences as “low-risk” properties. There are a few requirements for considering a property as a primary residence. The first is that the property owner must reside in the home for the majority of the year (at least 6 months).

Another requirement is that the property must be located within a reasonable distance from a place of employment. Lastly, the resident must move in within 60 days of the closing date. In some cases, homeowners will need to prove their primary residence through official documentation like tax returns and government-issued ID.

What is a Second Home?

A second home is often referred to as a vacation home or even a home that is used while traveling for business. The mortgage interest rate for a second home is similar to that of a primary residence since it is also considered a low-risk investment by lenders.

Although the interest rate is similar, the down payment for a second home will be more – typically at least 10% of the property value. Similar to a primary residence, there are a few requirements if a property owner is in search of a second home:

  • The resident must reside in the home for at least some part of the year (14 days or more)
  • Location of the second home often must be within 50 miles of the primary residence (not always)
  • The property cannot be used as a rental or timeshare and it cannot be a part of a property management agreement

What is an Investment Property?

An investment property is exactly as it sounds; the entire point of owning it is for it to serve as some sort of investment. The most common type of investment property is to rent it out to either long term or short term rentals. Rental properties have the potential to bring in a high ROI. This is why more and more real estate investors are entering the vacation rental industry.

Investment properties are considered to be high-risk since it is impossible to know what the rental income will add up to. If someone applies for a mortgage, no matter how great that person’s credit score is, the monthly payment requirements might not be met if the rental property fails. For this reason, it is more difficult to be granted a mortgage for an investment property.

A Vacation Home as a Primary Residence

Now back to the original question, can a vacation home be a primary residence? Technically, yes, but only if the vacation home meets the requirements mentioned above for primary residency. The main requirement is that the owner must live in the property for a good portion of the year.

Why Turn a Vacation Home into a Primary Residence?

As mentioned before, a primary residence has the lowest mortgage rate out of the 3 property types (primary, secondary, and investment). Filing property taxes is much less complicated for a primary residence as well. These are just two of the many reasons for wanting a vacation property as a primary home.

The Owner Plans on Living There Full-Time in the Future

As soon as a person retires, it is extremely common to want to set up shop in the vacation home – especially if it is surrounded by the stunning beaches of Bermuda. For anyone who plans on moving to a vacation home full-time, consider making it an official primary residence.

The Owner Spends Lots of Time at the Vacation Home

This is enough of a reason to turn a secondary vacation home in a primary residence. Just remember that you’ll need to spend the majority of the year in this property, at least 6 months. In most cases, property owners have to provide tangible proof of this.

Take Advantage of a Different Tax System

Every state is different when it comes to income and property taxes. Anyone with properties in two different states needs to consider each state’s tax system when deciding on a primary residence. The smart decision is to choose a primary home based on which property is located in a state with a more beneficial tax system.

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How do does your vacation home stack up to the competition?

Are you making the highest revenues possible from your vacation rental? Find out with our free vacation rental performance score.

Compare your vacation rental’s performance to other properties listed in the same markets (both local and broader) and track your progress with dynamic scoring.

As you optimize pricing and occupancy rates, your score will improve accordingly

Are Short-Term Rentals Considered A Business?

So, you want to make a bit of extra cash by renting your property but aren’t sure about the legality of the short-term rental industry. In most cities and destinations around the world, short-term rentals are considered to be businesses, as they are making the property owner, or landlord, money.

For many destinations, the short-term rental industry is exacerbating problems in the long-term rental industry, as landlords or homeowners can make better money from a short-term rental than they can by renting to long term residents. From the rules in different cities around the world, through to the penalties of operating an illegal short-term rental business, here’s the lowdown on short-term rentals and to what degree they are considered a business.

Extra Money

Short-term rentals are a great way of making extra money — and just by renting your property for a few nights in a month, you can make more than if you were to rent long-term. This is primarily why landlords and homeowners are opting to list their properties on short-term rental sites, such as Airbnb, HomeAway, and VRBO, as they can make much more money. However, short-term rentals are causing a lot of problems for locals looking to rent for reasonable prices, and it’s driving huge inflation in the rental market.

The extra money you can make from renting your home is considered a business in most countries. And many countries, therefore, require that the money is registered, accounted for, and taxed. Every destination is handling this differently, with some offering a ‘grace’ period whereby you can rent your home for a limited amount of time, without it counting as a business, and others destinations count any period of short-term rental as taxable money.

Demand

A large percentage of tourists traveling to top destinations want to stay in short-term vacation rentals, as opposed to hotels. This is because vacation rentals can work out a lot cheaper, they feel more like staying in a ‘home from home’, they have more privacy, and provide a more local experience. Many homeowners and landlords are stepping in to soak up the demand.

Clamping Down

Cities and destinations all around the world have been clamping down on the short-term rental industry as it becomes increasingly difficult to control inflation for locals. Since the arrival of vacation rental sites such as Airbnb and VRBO, popular tourist destinations have been under pressure to implement strict restrictions on the short-term rental market.

Short-Term Rental Laws Around the World

Cities around the world are handling the short-term rental industry in different ways. We’ve taken a look at Hawaii, Toronto, Singapore, and New York:

Hawaii

To take Hawaii as an example, recently lawmakers in Honolulu passed legislation to make sure that the state is benefitting from Hawaii’s flourishing short-term vacation rental industry. Honolulu City Council passed tax-raising legislation whereby rental platforms are now responsible for collecting taxes on behalf of the homeowners listing their properties. Meanwhile, in other destinations around the world, the homeowner that is listing their property can be responsible for paying taxes, and many cities are requiring homeowners to have a short-term rental license if they wish to list their property.

Toronto

If we look at Toronto as a second example, the Canadian press recently ran several stories on the fact that Toronto has announced a series of proposed regulations for short-term rentals. A short-term rental will be defined as a period of fewer than 28 days and short-term rentals will only be permitted in primary residences, which means hosts are only allowed to list one property for short-term rental. This means that landlords and homeowners who own multiple properties cannot rent a second property (or further properties) for a ‘short-term’ period. There are also proposed rules that a homeowner can only rent their property as a short-term rental for 180 days in a calendar year in total. Income gained from the short-term rental is considered rental income by the Canada Revenue Agency and therefore must be taxed like any other rental income. So for the city council in Toronto, they really see short-term rental as a business.

Singapore

In Singapore, it’s illegal to list properties for a rental period of fewer than three months. These strict regulations are imposed to stop people from operating illegal businesses in the short-term vacation rental industry. As a result, it’s almost impossible to operate a short-term rental business in Singapore.

New York City

Meanwhile, in New York City, it’s illegal to rent an apartment or condo there for less than 30 days, with very few exceptions to this rule, so it’s difficult to even operate a short-term rental business. For rental periods that are longer than 30 days, the rate of tax depends on a variety of factors.

Operating Illegally

With many people continuing to list their property regardless of the rules, cities are clamping down on those that are running an illegal short-term rental business through Airbnb and similar vacation rental platforms. For many homeowners and landlords, the risk of being caught is worth the amount of money that you can make through short-term rentals. Many people also look for loopholes or list on Facebook or platforms such as Craigslist that aren’t regulated to the same degree as platforms like Airbnb and HomeAway. There are plenty of stories in the news about people that have violated short-term rental laws, and been operating a business illegally. Do not be one of these people — always stick to legal channels.

Penalties

Every city in the world is handling the short-term rental market in a different way, however, something most destinations have in common is high penalties including huge fees and the chance of a jail term. In San Francisco, for example, the fine is $484 dollars per day if you’re operating an illegal short-term rental. For repeat offenders in many cities, the penalty is a jail term.

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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.

Lodging Tax

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.

Consider Assistance

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.

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Vacation Homes – Depreciation & Tax

Dealing with the property taxes relating to a vacation rental home is enough to make some property owners throw in the towel and call it quits. Nobody enjoys doing their taxes, especially when a rental property is involved. Some accountants even claim to dislike working with clients who rent out vacation homes during the tax year.

The main reason for this aversion to rental-related taxes is the difficulty involved. Since a vacation home brings in a certain amount of rental income, completing the year-end tax reports can be tricky. Rental and personal properties have completely different sets of tax laws, namely because one generates an income while the other does not.

No matter how much income a vacation homeowner has generated throughout the year, nobody enjoys handing their hard-earned money over to the government. There is good news, though, and that rental properties come with a few unique tax benefits that residential properties for personal purposes do not.

Vacation Home Tax Benefits

The main benefit of renting out a home to vacationers is that rental property owners are eligible for tons of deductions. This means that almost all rental expenses can be deducted from the rental income come tax time. This, in turn, leads to less liability for rental property taxes, so it is essential to keep track of rental expenses throughout the year.

Tax Deductible Rental Expenses

Generally speaking, as long as a rental property owner can prove that money spent is meant for running the rental property, that expense can be deducted. This includes everything from rental marketing to repair and maintenance. Rental property owners are even able to write off the cost of towels and bedsheets used by guests. Here are a few of the most common deductible vacation rental expenses:

  • Maintenance, repairs, and cleaning costs
  • Rental insurance
  • Marketing and advertising
  • Utility costs
  • Rental supplies (towels, sheets, kitchen items, etc.)
  • Vacant rental property costs

The Basic Requirements for Rental Deductions

Reading about the deductible rental expenses might sound too good to be true. Well, deductions can indeed be made, but it is to meet the basic requirements as a rental property owner first. For property rentals in the US, the IRS has fairly strict requirements on who can deduct and what can be deducted.

The first requirement of the IRS is in regards to the number of days the property is rented annually. The current tax laws in the US state that the property must be rented out for at least 14 days during the year. For those of you doing this professionally, chances are the rental days exceed this by a great deal.

However, anything less than 15 days and the IRS considers the property to be a second home and certain itemized deductions won’t apply. The next requirement has to do with the amount of time the rental owner spends at the property himself or herself. If this time is more than 14 days per year, only a small portion of deductions can be made.

Depreciation Deductions with Vacation Homes

The real question among rental owners is whether or not the rental property is considered depreciable. To answer this question as simply as possible, vacation homes are depreciable. This means that the property owner can deduct the cost of buying and fixing up a rental property over time.

Investopedia says that “rather than taking one large deduction in the year you purchase (or improve) the property, depreciation distributes the deduction across the useful life of the property.” The depreciation requirements of the IRS are very specific. The deduction will only legally apply if the rental property fully meets these requirements, which can be found below.

The Renter Must Own the Property

Before depreciation can even be considered the individual applying for the deduction must own the property. Leasing a property out and submitting a depreciation deduction on year-end taxes won’t fly with the IRS. And no, don’t try to get away with the property being in the name of a family member.

The Property Must Generate an Income

The rental activities of a property must generate some sort of income. In other words, if money isn’t being made, the deduction for depreciation does not apply.

Determinable Useful Life is Required

A property that has a determinable useful life is essentially one that has an expiration date at some point in the future. This applies to most properties since no structure lasts forever. The apartment, condo, or house must have the potential to decay and wear out over time, eventually deeming it obsolete as a vacation home.

The Property is Expected to Last for 1+ Years

Lastly, depreciation can only be applied if the owner expected the rental business to last for at least one year. If at any time during the tax period the rental business ended, depreciation won’t apply.

When Does Depreciation Officially Begin?

As soon as a property becomes available for renting (and as long as it meets the above requirements) depreciation can begin. Here’s a more specific example for rental real estate tax depreciation:

The property purchase price is agreed to and the closing takes place on January 10th. However, the property is in need of some major renovation. After a few months of work, it is finally ready to be rented out to guests on March 31st.

On that day, the rental is advertised on listing sites, but the first renters arrive on April 17th. Even though the place wasn’t booked until mid-April, depreciation can be accounted for starting on March 31st. Since the property was ready to be rented on March 31st, that day marks the official start of depreciation.

What’s the Bottom Line with Depreciation?

Although it can quickly become complicated, you should consider depreciation a valuable vacation home tax tool. Don’t be afraid to hire a tax expert to help you figure out the ins and outs of rental property depreciation as April 15th approaches. Rental depreciation laws and requirements are constantly changing. Hiring a tax expert is the best way to ensure proper tax filing (and the most rewarding deductions).

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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.

The Basics

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.

14-Day Rule

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.

Writing-Off Expenses

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.

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Can A Vacation Home Be A Tax Write Off/Tax Deductible?

Understanding how to properly complete a year-end tax return for a vacation home can be challenging. There are many factors involved in vacation home tax laws, like whether or not this serves as a personal residence or if the home is rented to guests. No matter if a property owner plans on using this home for vacationing or a high rental income is on the agenda, considering vacation home tax deductions is a must.

Taking advantage of each itemized deduction that applies to a vacation home might start to feel complicated. Even so, it makes financial sense to take advantage of whatever possible when filing property taxes. Money-saving deductibles make up for the lofty price of owning a vacation home, and they can even make up for rental losses.

Understanding what aspects of a vacation home can be written off as a tax deduction is the first step. Every vacation home owner’s situation is different, making things a bit confusing for those considering themselves unsavvy with tax laws. This guide on how tax deductions can be applied to US-based vacation homes can help.

The Inside Scoop on Mortgage Interest Deduction

The main factor of deductions on mortgage interest rates is whether the property owner uses the vacation home for personal use or if it is rented out to guests. For renters, the number of days during the year that the property is occupied with renters also comes into play.

Mortgage Interest Deduction for Personal Use Homes

Homeowners have been loving the mortgage interest deduction for years since it means that owning a home can be affordable. This is especially true for anyone owning a vacation home that is meant strictly for personal use. In this case, there is no intention of renting it out to earn an income.

Property owners that fall within the category can often deduct mortgage interest just as they would with their first home. Come tax time, there are a few requirements that need to be met before a mortgage interest deduction can be claimed. First of all, the form 1040 from the IRS must be completed with an itemized list of deductions.

Whether filing as a single or jointly as a married couple, it is possible to claim a deduction for 100% of the mortgage limit with a cap placed on a certain amount. The cap number depends on when the mortgage started since recent tax changes came about with the Tax Cuts and Jobs Act of 2017.

Tax Cuts and Jobs Act of 2017

This tax reform was set in place under the Trump Administration and will be applied to tax years 2018 to 2025. This new tax law affects how much homeowners can deduct from mortgage interest rates. Here’s how it works according to Investopedia:

“For tax years 2018 to 2025, the minimum limit is up to $750,000 of debt secured by your first and second homes – or $375,000 if you’re married and filing separately. However, if your mortgage existed before Dec.16, 2017, you’ll continue to receive the same, more generous tax treatment as under the old rules, with the interest on mortgages and any other loans deductible on up to $1 million in debt.”

Any homeowner with a mortgage that began before December 2017 doesn’t have to worry about the Tax Cuts and Jobs Act.

Mortgage Interest Deduction for Rental Property Homes

Needless to say, the tax laws get much more complicated when a vacation home is rented out and an income is generated. Deductions still apply, but claiming them takes more work and more proof. There are three main categories for vacation homes that are rented out, and tax deductions work differently for each one. These are the three categories:

  1. The owner rents the property for 14 days or less
  2. The owner rents the property for 14+ days and does not reside there often
  3. The owner stays in the property for 14+ days and does not rent it often

The Owner Rents the Property for 14 Days or Less

When an owner rents the property out for less than 15 days of the year (14 nights), the money made from renting it out does not count as taxable income. In this case, the property will still be considered a personal home. Property taxes and mortgage interest deductions will fall under the “second home” category.

This is an amazing deal with the IRS, especially if the home has a stellar nightly rate. No matter if guests pay $10 or $1000 per night, the amount does not need to be claimed as long as the rental time remains at 14 days or less.

The Owner Rents the Property for 14+ Days

In the case of renting for more than 14 days, the owner needs to claim any rental income earned on the yearly income taxes. The other requirement for this to be dubbed a “rental property” is that the owner stays in the home for less than 14 days. As long as these requirements are met, the owner can deduct all sorts of rental expenses. The potential rental property deductions include:

  • Property taxes
  • Mortgage interest rates
  • Utility bills
  • Rental housekeeping services
  • Property management fees
  • Property depreciation

The Owner Stays in the Property for 14+ Days, Renting Infrequently

If the owner resides at the property for a number of days that is greater than 14, the home will be considered a personal residence and not a rental property. The other requirement is that the home is rented infrequently, anything less than 14 total days. In this case, rental losses can’t be claimed since it isn’t technically a rental property.

Other Potential Vacation Home Tax Write-Offs

In addition to the mortgage interest deduction, there are plenty more potential tax write-offs for vacation homes. Property owners are often able to deduct home equity loans, and the same goes for real estate tax. All in all, owning a second home is an amazing investment considering the potential tax deductions.

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