Property Management 8 mins read

Taxes on vacation rental properties: what you need to know

By February 18, 2020 March 19th, 2020 No Comments
taxes for vacation rental management companies

The vacation rental marketplace is growing by leaps and bounds. Online short-term rental platforms like Airbnb, HomeAway, and VRBO make it easy to offer your entire home or a room as a rental.  On the other hand, vacation rental property management platforms (PMPs) such as Hostfully’s help manage your business across multiple channels.  With these technologies now firmly established, it’s never been easier to make a living in the hospitality industry.

But while running a successful vacation rental company can be profitable, exciting, and rewarding, it’s still a business.  And that means paying income and lodging tax.

In this article, we’ll discuss everything owners need to know about splitting your income with your silent investor – err we mean paying taxes on vacation rental properties in the US.

Tax tips to know about vacation rental property

As a vacation rental property owner, you must pay taxes on your rental income. Fortunately, there are ways to keep your taxes low, and potentially eliminate them altogether.

14-day rule

If you rent the property for more than 14 days AND personally use the rental for less than 14 days OR less than 10% of the total days you rent to guests, you’ll need to pay tax on the income – but you’ll also be able to deduct a variety of expenses.

Keep detailed records of rental income and expenses

Treat your vacation rental property as a business by keeping meticulous records. Doing this will help avoid tax issues and make it much easier to prorate or separate personal, and business uses and expenses.

Note that if you use a property management platform (PMP) like ours, the cumbersome task of tracking income by property across all booking channels is done for you.

Document your business expenses

The IRS allows you to deduct “ordinary and necessary” expenses related to your vacation rental property. Be sure to organize your receipts and records so that they’re easy to find if and when you need proof of your expenses.  If you’re like us and can’t stand paperwork, there are numerous apps that can help you streamline your business operations, including keeping track of expenses.

W-9 taxpayer identification number

Online rental property platforms are required to withhold 28% of your gross rental income if you don’t provide them with a W-9 form. Instead of allowing the government to keep so much of your income until the end of the year, be sure to complete and file your W-9 right away with every vacation rental company you’re making bookings on.

Pay self-employment taxes

When you own and operate a vacation rental property, and that income is significant, the IRS could treat you as being self-employed in the vacation rental business. So, you may need to pay self-employment taxes like Social Security and Medicare from your gross vacation rental income. If you’re unsure whether your vacation rental income may count as self-employment, contact a tax specialist as soon as possible.

Tax reporting by online vacation rental platforms

Platforms like Airbnb, HomeAway, FlipKey, and VRBO aren’t required by the IRS to provide you with a year-end 1099 income statement unless your income and transactions exceed a certain amount. However, the IRS still expects you to report and pay taxes on the income you receive.

Short-term lodging taxes

Many states, counties, and cities require vacation rental property owners to collect a lodging or occupancy tax from their guests. If you’re using an online listing platform, the company is probably already doing that for you in most touristic centers. However, in less-frequented counties, some taxes may apply that aren’t collected by Airbnb or VRBO. In those cases, check your local laws and regulations online, or call.

Toward the end of this article, we’ll go into more detail on licensing, collecting, and filing lodging taxes if you’re renting to guests directly.

How vacation rental tax property deductions work

Vacation rental property owners should always be aware of their state and federal income tax responsibilities.

The National Association of Realtors has put together a Short-Term Rental Tax Rate Chart by State. However, rental tax laws can quickly change, so it’s a good idea to check with your State Department of Revenue website or your accountant for the most up-to-date information.

Tips on Rental Real Estate Income, Deductions, and Recordkeeping from the IRS lists the deductions you can take as an owner of rental property to help keep your federal taxable net income low.

Keep in mind that if you don’t meet the 14-day rule, the IRS considers your property a personal residence. So, these vacation rental tax deductions (except for interest and property taxes) are limited up to the amount of rental income.

Rental property tax deductions

In general, you can deduct the ordinary expenses incurred in managing and maintaining your vacation rental property. The IRS considers “ordinary” to be expenses that are generally accepted in the vacation rental business to keep your property in good operating condition.

  • Mortgage interest
  • Property management fees
  • Real estate agent or leasing fees
  • Vacation rental platform fees
  • Property taxes
  • Rental taxes
  • Credit card interest
  • Depreciation
  • Advertising
  • Maintenance
  • Repairs
  • Utilities
  • Insurance
  • Materials
  • Supplies
  • Travel and transportation expenses
  • Home office

Frequently, property owners use their vacation rental for both guests and personal use. In a situation like this, you’ll need to divide or prorate the deductible expenses based on the number of days for each type of use.

Note that most expenses related to the guest experience, including welcome packs or gifts, can also be considered tax deductions.

Three more vacation rental tax deductions not to miss

The Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017, by President Trump brought significant changes to the tax code and additional potential tax deduction benefits for vacation rental property owners.

Some of these tax deductions are scheduled to expire the end of 2025, so be sure to take advantage of them while you can:

  1. A pass-through business tax deduction allows rental property owners who meet certain requirements to deduct an amount equal to 20% of their net rental income
  2. New deduction for significant improvements allows some vacation rental property owners to deduct the cost of fire and security systems, roof replacement, and heating and cooling systems
  3. Bonus depreciation deduction allows 100% deduction of personal property used in business – including appliances and furniture – all in one year

Collecting, paying and filing lodging rental taxes

As the popularity of short-term vacation rental property has grown, so has the government’s interest in collecting potential untapped lodging tax revenue. These taxes are different from the state and federal income taxes paid by owners of vacation rentals.

Lodging or occupancy taxes vary from place to place and are usually charged and collected based on a percentage of the rental income paid by the guest. Online rental platforms like Airbnb and VRBO may already collect and pay these taxes for you.

But if you’re renting directly to guests, the law makes vacation rental owners responsible for getting licensed, collecting, filing, and paying taxes. Owners that don’t may face penalties, interest on unpaid tax, and even legal action.

  • Rules may vary by state, county, city, and municipality so always be sure to check your local requirements
  • Business license and registration may be required on a state, county, and local level
  • Collecting short-term or lodging taxes from your guests based on the different tax rate percentage that each taxing authority charges
  • Filing and paying taxes due is done monthly, quarterly, or annually based on the various due date of each jurisdiction

Wrapping things up

Tax deductions for your vacation rental property can reduce taxable income and let you keep more money in the bank.

In order to harvest as many savings as possible, it’s important to understand the rules and accurately track all of your income and expenses as legally allowed. In addition to paying state and local income taxes, vacation rental owners are also responsible for collecting lodging or occupancy taxes from their guests.

The takeaway:

  • 14-day and 10% rule govern your vacation rental tax deductions
  • Always provide online booking platforms with a W-9 form
  • Vacation rental property owners may have to pay self-employment tax
  • IRS allows rental property owners to deduct a variety of business and operating expenses
  • Most states, counties, cities, and municipalities also require owners of a vacation rental property to collect, file and pay lodging or occupancy taxes