Taxpayers renting out homes or spare rooms should be aware of the tax implications of these rentals.
When is the rental of a primary residence or vacation home taxable?
The Internal Revenue Code provides the rental of a property that is also occupied by the owner (“host”) as a residence for less than 15 days during the year is not taxable. The host is considered to use the property as a residence if they use it for personal enjoyment during the tax year for more than the greater of (1) 14 days or (2) 10% of the total days during the year they rent it to others.
The tax rules are more complicated when the vacation home is used by the host for more than 2 weeks and also rented for a substantial part of the year.
For example, a host spent 60 days last year in their ski cabin in Vermont. For the remainder of the year it was rented for 180 days. The host can deduct 75% (180 days out of 240 days) of the ski cabin’s qualifying rental expenses against the rents collected. It is important to note that if expenses exceed rental income, the loss is not deductible.
Where is income from short-term rentals reported?
Many rental services, such as Airbnb, report the rental payments they send to hosts by filing IRS Form 1099-MISC. The IRS matches these 1099’s to tax returns to verify that rental income was reported.
If the host’s property is rented for more than 14 days per year, the exception noted above will not apply. Instead, the host will have to report and pay income tax on the rental income by filing IRS Schedule E along with the tax return. The host will also be allowed to deduct rental-related expenses, subject to limitations
Do hotel taxes apply to short-term rentals?
Lodging or transient occupancy taxes, which are commonly referred to as hotel taxes will typically apply to rentals of 30 days or less in some areas. Some jurisdictions will impose taxes for rentals that exceeds 30 days, such as Florida which taxes rentals of six months or less. These taxes are separate from any income tax they may be owed on profits from renting the property.
Airbnb will collect the applicable lodging taxes on behalf of its “hosts.” For instance, Airbnb has made an agreement with the Vermont Department of Taxation to collect the Vermont Meals and Rooms Tax on payments for lodging offered by its hosts. However, many other rental listing sites, such as HomeAway, will not collect the taxes for property owners. An internet search or browsing of the listing company’s website will provide their policy on collecting the taxes.
There are services available, such as Avalara’s MyLodgeTax, that assists hosts with filing and remitting their lodging taxes. These services are offered for monthly fees.
We’ve got your back
Ready to become a part of the sharing economy? If you’re considering renting out even part of your home, reach out to KRS so that we can help you stay on top of the tax rules. Contact me at [email protected] or (201) 655-7411.
You can also download my free Tax Tip Sheet for more ways to save taxes when buying or selling a rental property.