Do you rent out a vacation property or part of your primary residence? Are you familiar with the rules regarding short and long-term rentals? Learn more about paying taxes on vacation rental income, so you can enjoy the extra money and avoid penalties.
Tax-Free 14 Days
Rentals under 14 days per year that are also your personal residence for more than that rental period are tax-free. It doesn’t matter if you rent a floor, room(s), or the entire place. Thus, you won’t owe extra taxes if you offer lodging during a big event or festival in town. You may still receive a letter from the IRS, so provide documentation to prove you met the under-14 days rule. If you use AirBnB or VRBO services, they must report all contracts as part of their accounting requirements.
Percentages on Lengthy Stays
If your rentals exceed 14 days per year, you have to file the Schedule E, Supplemental Income and Loss form. For deductions, add up all house-related expenses, and apply accordingly to the total rental period. The two-fold formula is simple:
- 365 divided by total rental days = percentage of rental to claim
- Percentage of rental times total expenses = deductions to claim
If you’re renting only a room, use a fraction of your total rooms (i.e, two bedrooms out of three equals 2/3). In cases of more than one co-owner, each applies the percentages figures to their portion of ownership.
Documenting Vacation Rental Income for Tax Purposes
It’s important to maintain clear distinctions between house expenses for your personal use and for guests/tenants. This may mean separate purchases even if you’re buying similar items for both purposes (dividing up towels, soaps, etc). Ohio residents need to check if they live in a RITA municipality, and will owe Ohio regional income tax.
When determining taxes due on vacation rental income, also understand these terms:
Occupancy Tax: Check for local occupancy taxes included with the rental charge, and whether your booking site (if applicable) collects it
Bed and Breakfast: Your rental may be considered a B&B if you never use it personally, and provide certain amenities such as meals. If so, you need to file Schedule C, Profit or Loss From Business, and the W-9 forms. The W-9, Request for Taxpayer Identification Number and Certification, commonly used for self-employment and freelancers, is required by booking sites. Otherwise, they will typically hold almost 30% of your rental income.
“Fair Rental Price”: This refers to the average going rate for rentals in your area. If you charge a relative or friend under that rate, their stay is counted as taxable.
Minimizing Taxes on Vacation Rental Income
To ease budgets and filing time, use spreadsheets and bookkeeping software that help track freelance income for tax purposes. This way you maintain an organized, efficient way to schedule rentals and monitor peak rental times. Remember to deduct any company service fees from your income report. You may also want to add a column for Rental and Personal Use dates. Any time you spend at the property exclusively for maintenance counts as just that, and not personal habitation. This makes figures more distinguishable, especially in the case of an audit or time when you have to provide more details.
Keep track of changes that can affect vacation rental taxes. As MarketWatch’s explains, the Tax Cuts and Jobs Act lowers income tax rates and provides a new qualified business income deduction. Knowing all of the relevant details is crucial so, when in doubt, consult a licensed accounting firm.
Whether incurred occasionally or consistently, don’t let paying taxes on vacation rental income detract from the venture. Enjoy the experience of providing hospitality services, and the extra generated revenue!