While the tax rules for vacation rentals may appear complicated, they should not be difficult to comprehend. To make things simpler for you, we’ve compiled this FAQ with answers to the most often asked questions about holiday rental taxes. Continue reading to learn the fundamentals of holiday rental property taxes. To discover the ins and outs of holiday Rental Property Tax Rules and regulations, you may also consult IRS Publication 527.
Bear in mind that nothing included in this article should be construed as tax advice. Always visit your tax professional if you have any tax questions or concerns.
Is It Necessary to Pay Tax on My Vacation Rental?
To determine whether you owe taxes, you must first understand the distinction between a personal residence and a vacation rental home. Additionally, it would help if you learned the 14-day rule, which may significantly influence how you compute your taxes.
What Does the Term “Personal Use of Property” Indicate?
Are you sometimes utilizing your vacation rental property as a second home? Or perhaps your relatives and friends vacation at your vacation home? If this is the case, it will influence calculating your taxable income and any deductions.
To avoid getting into trouble or paying a fee, you must understand what the Internal Revenue Service (IRS) considers personal use. They define personal use as “usage by the owner, the owner’s family, friends, and other property owners and their families.” Private usage is defined as “anyone who pays less than a reasonable rental rate.”
A day of personal use of a housing unit is defined as any day on which you, a family member, or a friend uses the property without having to pay what is considered a market-related fee.
However, if you labor full-time on repairing and maintaining (not improving) your property, this time is not considered personal use. This is critical for hosts to understand since it may influence your deductions.
How Much Is Rental Income Considered?
If you exceed the 14-day restriction, you must notify the IRS of your income. Vacation rental revenue includes all payments received for renting your home, including security deposits and other expenses. However, this sum should be subtracted if you have refunded the guest’s whole security deposit after checking out.
You may get compensation for canceling a reservation depending on your cancellation policy. This figure should also be included in the rental revenue calculation.
How to Report Rental Income to the Internal Revenue Service?
When assessing your rental activity’s net income or loss, you may need to do more than report your revenue and business costs on Schedule E. (Form 1040). Depending on your activity, you may have to utilize additional forms.
Seven Critical IRS Rules to Remember as a Vacation Rental Owner
Even with a wealth of tools at one’s disposal, making sense of holiday rental tax requirements needs some intelligence and effort. It becomes much more difficult when you have a portfolio of properties. Whether you manage a single rental or a portfolio of properties, the following advice can help you reduce your workload and stress.
1. Familiarize yourself with state and local rules and regulations.
Because tax laws, local laws, and regulations vary by state, you must become familiar with state and local government laws. In certain places, the revenue generated by your short-term rental may influence anything from licensing to taxes.
For instance, while some states collect hotel tax on short-term rentals, others do not. Additionally, it would help familiarize yourself with homeowners’ organizations (HOAs) regulations.
2. Maintain meticulous records of your rental periods
Given the 14-day rule’s significance, you must keep meticulous records of when you leased out your home, when you utilized it for personal purposes, and when you were occupied with repairs. By making an effort to keep your rental logs current, you will make the process of completing your tax return much easier.
3. Keep track of all business-related spending.
Because you are legally permitted to deduct ordinary business expenses incurred while operating your vacation rental business, it is critical to maintaining accurate records. If you’re pressed for time and forced to analyze a year’s bank statements, you’re bound to make errors (and hate yourself for making an easy task more difficult). Please do not leave it until the very last minute.
4. Ensure that you complete a W-9 form.
If you do not provide the vacation rental platforms with a completed W-9 form, they are required to withhold 28% of your rental income. Because your effective tax rate will almost always be less than 28%, you will grant the appropriate authority the right to retain your overpayment for a year. If you submit the W-9 form, however, the vacation rental platform will be able to reduce the percentage and grant access to your entire rental income.
5. Subtract host service charges
Because you can deduct the entire host service fee from your rental income, it is also important to keep track of it. Typically, vacation rental platforms such as Airbnb file a 1099 form with the IRS. They will report your rental income and any hosting service fees that you must pay on this form. While this may seem like a small expense, it quickly adds up. After all, every little bit counts.
6. Do not overlook the occupancy tax.
Frequently, hosts are compelled to collect occupancy tax from their visitors directly. In this situation, they will also be responsible for sending the occupancy tax collected to the local tax authorities.
However, vacation rental listing sites such as Airbnb are permitted to collect in certain states and cities. And submit payment on behalf of the host. Therefore, determine who is accountable for managing and raising money in your location.
Additionally, in some jurisdictions, occupancy tax is referred to by another name. For instance, in some states, the tax is referred to as the hotel tax, while in others, it is referred to as the transient lodging tax.
Read more: How Rich People Avoid Inheritance Taxes?
7. Make self-employment tax payments
If you rent out your home and provide services, the IRS may classify you as self-employed. In this case, you will be required to pay self-employment taxes in addition to income tax. In a nutshell, this amount is intended to cover Medicare. And Social Security contributions associated with the income generated by your own business.
Conserve Time on Property Management to Ensure Proper Tax Preparation
Even if you are knowledgeable about the tax implications of your vacation rental property, maintaining comprehensive records is a time-consuming process. As a result, you require all available assistance.
The host’s only concern should be to provide a first-rate guest experience. Vacation rental software, such as Lodgable, can help you save time on other routine tasks such as guest messaging and cleaning management, giving you more time to concentrate on tax preparation and sleeping soundly at night.
