With the rising popularity of Airbnb and other vacation rental companies, more and more people are renting their homes and learning about a new set of tax issues that come with it. When you offer your home, or a room in your home, as a short-term rental through services such as Airbnb, HomeAway, VRBO, FlipKey and many others, you can keep your income taxes to a minimum—and sometimes eliminate them entirely—if you follow some of these useful tax tips.
1. Learn about the 14-day rule
Tax laws are full of exceptions, but the 14-day rule—sometimes called the "Masters exception" because of its popularity in Georgia during the annual Masters golf tournament—is the most important for anyone considering renting out a vacation home. Under this rule, you don't pay tax on income you earn from the short-term rental, as long as you:
- Rent the property for no more than 14 days during the year AND
- Use the vacation house yourself 14 days or more during the year or at least 10% of the total days you rent it to others.
Portland resident Alice Chan earns extra income by renting out her vacation home on the Oregon Coast several times a year. These days, she is careful to keep the total rental time under 14 days—a tactic she recommends to others.
"The first year, I accepted guests for two one-week stays, plus 10 days over Christmas," Chan says. "I ended up paying hefty taxes and investing a lot of time in trying to figure out my tax deductions and finances. Now, I just stick to the 14-day limit."
2. Learn about exceptions for rooms
If you just rent out one room in your house, the 14-day rule applies in the same way as if you rent out your whole house. Fourteen days or less, you don’t even have to report the income on your taxes, but you cannot take any deductions either.
3. Don't panic if you get an IRS letter
The rule is simple: you don't have to report rental income if you stay within the 14-day rule. However, because of reporting laws, companies like Airbnb, HomeAway and VRBO may report to the IRS all income you receive from short-term rentals, even if you rent for less than two weeks.
If this happens, and you don't include the income on your tax return, you may hear from the IRS. Don't panic. You'll simply need to prove the income qualifies for the 14-day exception.
4. Keep flawless records of rental periods
You'll have a much easier time with tax issues on your short-term vacation rental if you treat it as a business from the get-go and keep meticulous records.
If you rent out your place for two weeks or less, keep careful track of both rental days and those days you used the residence yourself. If you rent for longer than the 14-day exception period, detail the dates precisely so you can properly divide out personal and business expenses, like mortgage interest.
5. Document all business expenses
You are entitled to deduct all “ordinary and necessary” expenses to operate your rental business. Like the "B&B" in Airbnb, think of your rental as a bed-and-breakfast. If you buy new towels for your guests, repaint the guestroom or put a bottle of wine on the table for incoming guests, you can deduct these expenses from your rental income.
By keeping clear records and recording all money you spend on the business, you won't have to go back through credit card statements for proof for the IRS.
6. Apportion mortgage interest and taxes if you rent room only
If you rent out a room, rather than the entire house, for over 14 days, you pay taxes on the rental amount and you can take business expenses. However, you can’t deduct 100% of expenses like mortgage interest and property taxes. These must be apportioned between personal and business use of your residence.
7. Fill out Form W-9 Taxpayer Identification Number
Airbnb, HomeAway, VRBO, FlipKey and similar companies must withhold a full 28% of your rental income if you don't provide them with a W-9 form. In most cases, your effective tax rate will be lower than 28%.
There's no reason to let the tax authorities hold your overpayment all year, so file that W-9. Once you do, the rental company can reduce the withholding percentage, giving you immediate access to the maximum amount of rental income.
8. Deduct the guest-service or host-service fees
Airbnb, FlipKey and other short-term rental companies usually charge a percentage fee, called a guest-service fee or a host-service fee that is taken off the top of the rent that guests pay. When these companies send you and the IRS a 1099 form reflecting your house rental earnings for the year, it includes the amount of service fees.
If you rented out your home or apartment for more than 14 days in the year, you can and should deduct this fee from your reported rental income. Since 100% of the fee was directly related to the rental use of the property, you can deduct the entire amount paid.
9. Learn about applicable occupancy taxes
Some state and local governments impose occupancy taxes on short-term rentals. These vary widely from one jurisdiction to the next, from the name of the tax—hotel tax in some states, transient lodging tax in others—to the rates and rules.
In many cases, the host is required to collect the occupancy tax directly from renters and submit the money to the tax authority, but some companies, like Airbnb, collect and submit the taxes in certain cities and states.
10. Pay self-employment taxes
If you are self-employed, you have to pay self-employment taxes, as well as income taxes. Self-employment taxes cover Social Security and Medicare contributions for income you make when you are in business for yourself.
When you rent out your home, make bookings and provide amenities, like coffee or breakfast, the IRS may treat you as being self-employed in the vacation rental business.