Hosting Short-Term Rentals on Airbnb or VRBO: A Tax Primer

Hosting Short-Term Rentals on Airbnb or VRBO: A Tax Primer

by Brendon Pack, June 2019

If you have space to share, whether just a private room, or an entire apartment, loft, condo, or house, renting it out on websites like Airbnb or VRBO (Vacation Rentals By Owner) can be a great way to supplement your income. But like anything that makes you money, you'll want to be sure you understand the tax implications so you can plan ahead for tax time.

When You Need to Report Rental Income

Whether or not you need to report rental income depends on several factors. Anyone who rents a room or property for more than 14 days over the course of a year needs to report rental income and pay the appropriate taxes. How much you pay, which deductions are available to you, and what IRS forms you need to file depend on a couple of factors. You'll need to ask yourself:

  • Did you stay in the home more than 14 days a year or more than 10 percent of the days it was rented out to others? If so, the tax guidelines you follow fall under “personal use of the home" rules. This is true even if, for example, you own a vacation cottage you sometimes stay in, but you rent it out at other times.
  • Did you provide any goods or services to guests, such as meals, cleaning, or doing laundry? If so, the IRS may consider you a bed and breakfast or hotel, and you may be required to pay additional taxes. This can also apply even if you only rent out a room in your home. As long as the space is entirely dedicated as a rental, you will be subject to additional taxes.

Overall, if the IRS views your rental activity as an active business venture and not as passive income, you are required to pay not just self-employment taxes but also federal income taxes on your income. The key to how much you are required to report and what deductions you can claim hinges on whether your property is also used for personal purposes or as a home.

If you rent your property out less than 15 days, you do not need to report rental income and can't deduct any expenses as rental expenses.

Keep in mind, Airbnb or VRBO hosts are also usually obligated to pay an occupancy tax, lodging tax, or tourist tax. Known by different names, this tax is typically assessed by a state or municipal tax authority. You'll want to be sure you are in compliance with the local taxing and licensing authorities to avoid any other potential penalties.

Expenses that Can Be Deducted on Your Taxes

If you are required to pay taxes on your rental income, you'll want to take as many allowable deductions or expenses as possible to reduce your overall tax bill. If you use your rental property sometimes for personal purposes, you must divide your expenses and your deductions may be limited. Examples of the types of expenses you may be able to deduct include:

  • Advertising
  • Maintenance/repairs and cleaning supplies and services
  • Airbnb or VRBO service fees/commissions
  • Depreciation
  • Property insurance
  • Rent and mortgage costs
  • Property taxes
  • Management fees
  • Utilities (water, gas, electricity, TV, internet, trash, etc.)

To take full advantage of your allowable deductions, you'll want to keep good records and know your space. Some deductions require you to know the percentage of time you occupied the rental space for your own personal use. Others may require you to know the square footage of the rental space and of the entire home.

Tips For Preparing Your Taxes

Here are a few tips to help you prepare for next year's taxes:

  1. Get your records in order. Make sure you have clear records of all rental activity and that you have receipts for all expenses you plan to claim.
  2. Understand the tax implications of hosting. Brush up on where your rental activity fits in relationship to IRS rules.
  3. Consult with a tax accountant. Consider hiring a tax accountant to prepare your return to make sure you file the right forms and maximize your deductions.

Being an Airbnb or VRBO host can be a great way to generate a secondary income. And having a thorough knowledge of the tax implications of your rental activity can make the whole process less stressful come tax time.

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