Lately, short-term rentals have seen tax changes everywhere. Different places, different rules: from proposed taxes in locales like Aspen, Colorado, to the enforcement of levies in Victoria, Australia, and plans for tax hikes in Italy. In all this tax chaos, hosts like you need to be savvy with your finances and know tax tips for short-term rentals. So, how do you stay ahead? Easy—by mastering tax optimization for your short-term rental property.
What Is Tax Optimization for Short-term Rental Properties?
You’re renting out your place for quick getaways and want to keep more of that hard-earned income. So, what should you do? You need to adopt tax optimization strategies.
When you can optimize taxes for your short-term rental properties, you strategically minimize tax liabilities with income generated from renting out your property for brief periods. This way, you can legally amp up your deductions, slash your taxable income, and basically fine-tune your whole tax situation.
Bonus Read: How to optimize short-term rental pricing strategies for mid-term stays?
Tax Tips for Short-term Rental Properties
Tax optimization is all about working smarter, not harder. So, here are some tax tips for short-term rental property:
1. Leverage the 14-day Rule
Thinking about renting out your vacation home frequently? Before diving in, consider the tax implications and the time spent tracking deductible expenses. You might discover it’s more sensible to stay within the IRS’s 14-day limit to minimize taxes. Renting out your property for a few weeks can help with tax-free income.
Here’s the scoop: as long as you keep it under 14 days in a tax year and use it yourself for at least 14 days or 10% of the rental days, it’s a win-win. So, if your rental gig is for a limited time, the IRS 14-day rule might just make your tax season easy.
Now, if you’re opting for the 14-day rule for your property, keep a record of when it’s rented and when you’re getting back in it. That way, you’ve got the receipts to prove it’s your dwelling unit. But if you’re pushing past that 14-day mark, jot down rental dates to separate personal and business expenses.
2. Fill out Form W-9 Taxpayer Identification Number
Have you rented your property on Airbnb or a similar platform? Did you know these platforms might withhold a substantial 28% of your income if you don’t hand in a W-9 form? But here’s what you should know – your actual tax might be lower than this percentage! So, you must file a W-9 form on time and enjoy minimum tax withholdings on your rental income.
3. Separate Active Business Income and Passive Rental Income
The tax rules for short-term rentals depend on whether you provide many services and how you treat your rental activity. If you offer things like daily cleaning, outings, and meals, treating your rental like a business could get you more deductions, especially during years when your property doesn’t make much money. You can deduct expenses for things like cleaning supplies, staff wages, and entertainment costs.
But if you don’t offer many services and guests stay for short periods, your rental income will likely be treated as passive income. You can still deduct basic expenses like utilities and maintenance, but you might not get as many deductions as you would if you treated your short-term rental like a business.
It’s important to understand the difference between treating your rental as a business and passive income for tax purposes. Offering lots of services may mean more deductions, but it also means more paperwork and rules to follow. On the other hand, passive rental income might have fewer deductions, but it’s simpler to manage.
No matter which route you choose, keeping good records of your income and expenses is key to staying on top of your taxes and avoiding any trouble with the IRS. By knowing these rules and planning accordingly, you can make the most of your short-term rental property while keeping your taxes in check.
4. Deduct the Guest-service or Host-service Fees
Here is another tax tip for short-term rental property. When you’re Airbnb-ing or using FlipKey, they tag on a guest or host-service fee, a little cut from the rent. Now, when tax season rolls around, both you and the IRS get a 1099 form from these platforms, and it mentions your house rental earnings, including those service fees.
If you rented out your place for more than 14 days in a year, you can deduct the service fee from your reported rental income. Since it’s all about the rental use of your property, you can slash the entire amount from your taxable income.
5. Track Your Expenses
Did you know you can trim down your taxable rental income by getting deductions for “ordinary and necessary” operating expenses? Everything from that spare key for FlipKey to the new bed for your Airbnb could count as deductible business expenses.
Think property management fees, insurance, mortgage interest, property taxes, and even occupancy taxes. The list goes on with credit card loan interest, leasing fees, host service fees, platform fees, and more.
Keeping your rental receipts separate from personal ones and meticulously tracking every business expense as it comes in not only speeds up tax prep but also ensures you’re ready to prove those deductions if the IRS comes knocking.
6. Be Aware of Occupancy Taxes
Many states, counties, and local governments charge occupancy taxes on vacation rental properties. Now, here’s the twist—these rules and rates change from one place to another. For example, while Nevada, Atlantic City, Elizabeth, Jersey City, and Newark charge a 1% fee, the rates in Alaska vary from 3% to 12%. Plus, sometimes they call it hotel taxes, other times lodging taxes, and in some corners, it goes by transient occupancy taxes.
You might be obligated to collect these taxes from your visitors and hand them over to the local tax authority. However, note that companies like Airbnb sometimes handle all that tax hassle for you in certain states and cities.
Bonus Read: PriceLabs’ STR Index: Free Short-Term Rental Market Research for Any Country | PriceLabs
Key Take Aways:
Remember the 14-day rule, file W-9 on time, and know the difference between active business and passive rental income. Deduct service fees, track expenses carefully, and don’t forget occupancy taxes. Before we sign off, here are some last-minute tips:
- Consult with a tax professional or accountant specializing in real estate to ensure you take advantage of all applicable deductions and strategies.
- Use digital tools or apps to keep your records in order. This helps you organize your receipts and expenses easily, making it simpler when you’re preparing your taxes.
Master these tax tips for short-term rental, and running it will become even more profitable. You’ll pocket more cash and breeze through tax season, turning your hosting gig into a smooth and profitable ride.
