Many people find a way to boost their income by renting out their homes – or just a room – on vacation rental websites like Airbnb, HomeAway or VRBO. A growing number of people prefer to travel by renting a local home in their vacation destination.
People living in a desirable location may find that they can bring in substantial rental income for only a short stay during tourist-heavy periods. If you host on Airbnb or similar sites, you may be concerned about how your extra income might affect your annual income tax burden.
Here are some helpful tips that can help you minimize your Airbnb taxes and keep more of your extra income.
The 14-day rule is one of the most interesting and useful tax exemptions for Airbnb hosts. It has been referred to as the “Masters exception,” because it was widely used before the rise of Airbnb and its competitors to exempt people in Georgia who rented out their homes to golf enthusiasts flocking to the town to watch the annual tournament.
It’s kept its popularity in the era of online vacation rentals. If you only rent out your home for two weeks every year, you won’t have to report your income on your Airbnb tax returns.
Here are the requirements to use the 14-day rule to save on your taxes:
- You must rent your vacation home for a maximum of 14 days throughout the year, and
- You must also use your own vacation home for 14 days or more, or 10% of the total of days that you rented it to other people.
If you only want to rent out your property to take advantage of a particularly desirable season or event, the 14-day rule might provide a significant amount of shelter.
Whether your city hosts a major sports tournament, concert or convention, you can charge higher prices for a desirable event while also limiting your exposure to Airbnb taxes.
Exceptions for Rooms
Most people think of the 14-day rule as it applies to vacation homes, but it can also apply to a room you rent inside your own primary residence.
So long as you only rent out the extra room for 14 days or less each year, you do not have to report your Airbnb income.
At the same time, you cannot claim itemized deductions if you do not report all of your annual business income, including that for rentals of less than two weeks.
If you don’t report your sub-14-day rental income, you might receive an IRS letter. After all, the IRS receives reports of all short-term rental income from Airbnb, HomeAway and similar companies.
If you document that the rental was 14 days or less, you don’t need to be concerned; you’re well within the exception, and you will just need to provide the relevant documentation.
Keeping Good Rental Records
That being said, keeping good documentation and records of your rentals is important, whether you’re renting only for a one-time event or a year-round second income.
It’s much easier to file your Airbnb tax returns if you have proper records of all of your income and the expenses associated with creating your vacation rental.
If you want to claim the 14-day exception, make sure to document your rental dates and your own time in your holiday property.
If you’re developing a year-round business, make sure to track all of your expenses and all of the dates when your property was rented. This can help you to claim all of the deductions for which you are eligible.
Documenting Your Business Expenses
When you’re running a short-term rental as an ongoing business, getting your home ready for guests can include some significant expenses.
You may need to hire cleaners or other service workers, buy guest sheets, towels and other professional-quality furnishings, paint the room or property or offer local food, wine or treats. After all, short-term rentals are a business, and businesses come with expenses.
It’s easy to have these costs stack up, but it’s important to keep good records when it comes time for your taxes.
Your business records are important to accurately document your income and prevent you from paying excessive taxes that don’t take your expenses into account.
Apportion Mortgage Interest and Taxes if You Rent a Room
If you rent a room in your home for more than 14 days, you’ll need to pay taxes on the income you bring in, and you can deduct your expenses.
Mortgage interest and property taxes will need to be apportioned, however, between the business use of your home and your personal use.
To report these deductions accurately on your Airbnb tax returns, keep track of the square footage used in your rental as well as the amount of time during the year when your room was rented out.
These calculations will help you accurately deduct your property taxes and mortgage interest on your annual tax return.
Short-term rental companies like Airbnb will ask you to complete an IRS Form W-9 to document your identity and tax liability.
If you fail to submit your W-9 form, they are required to withhold 28% of your income. In most cases, you will need to pay far less than 28% of your Airbnb or VRBO income in taxes if you report all of your expenses and deductions.
While you can get a tax refund, filing your W-9 with the company can avoid this extra complication and delay in receiving your rental income.
If you arrange your short-term rentals through a company like Airbnb, FlipKey or HomeAway, you’ll generally also pay a fee, deducted from your income.
This fee is based on a percentage of your income and is typically called a service fee, host fee or guest-service fee.
Your IRS 1099 form from the company will include the service fees that you paid to the website where you advertised your property. This fee can be deducted from your rental income as a 100% business expense.
There are other Airbnb taxes to consider when you operate a short-term rental. These depend on the specific area where you live.
State and local governments have imposed occupancy taxes that must be paid on short-term rentals. In many cases, these are another form of hotel tax also applicable to larger hotels in the area.
Make sure that you are aware of your municipal or state regulations, and find out about your liability.
In some cases, you may need to ask your own renters to pay you the occupancy tax; you can then forward it to the relevant tax authorities.
Some rental companies, such as Airbnb, take care of charging, collecting and submitting occupancy taxes where they have reached an agreement with a city or state.
When you bring in business income, you also have to think about self-employment taxes.
Separate from income taxes, these cover Medicare and Social Security contributions for income brought in through your business, freelance career or short-term rental.
Make sure to calculate your self-employment taxes if you’ve developed a business of renting out your home.