Vacation Rental Tax Rules: Tax Tips for STR Business in the US

vacation rental tax rules

By The Hospitable Team

With platforms like Airbnb, Booking.com, and Vrbo, and many others, it’s easy to rent your property short-term. But while the extra income can be a real boost, you should be aware of the tax rules before you start making money on Airbnb, so you know what you’re getting into.

In this article, you’ll find information about vacation rental tax rules in the USA and some useful tips on how you can keep your income taxes to a minimum.

Rental Income Tax

Any vacation rental property owner must pay taxes on their rental income. The good news is there are some ways to keep your rental income taxes low. Here are some of the key points to consider when you start a vacation rental business.

14-Day Rule

If you rent out your house for 14 days or fewer during the year, you don't have to report the rental income on your tax return.

According to IRS, the house is considered a personal residence so you deduct mortgage interest and property taxes just as you do for your primary home.

If you rent out your house for more than 14 days and limit your personal use to 14 days or 10% of the time the vacation home is rented, it is considered a business. You’ll have to report your rental income, but you’ll also be able to deduct expenses.

Keep Flawless Records of Rental Periods

If you treat your rental property as a business, keeping meticulous records is a must.  This way, you’ll avoid tax issues and you can properly divide out personal and business expenses. You should also record all money you spend on operating your business because the IRS allows you to deduct “ordinary and necessary” expenses.

Keeping detailed records of any expenses related to your rental property makes things much easier when it comes time to file your taxes. It will also help you in case the IRS has questions down the line.

Keep your financial records under control.

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File a W-9

If you don’t provide Airbnb, Booking.com, Vrbo, or other online rental property platforms with a W-9 form, they are required to withhold 28% of your rental income. Instead of allowing the government to keep your income until the year-end, file the W-9 and keep your money, especially if you abide by the 14-day rule.

Pay Self-Employment Taxes

If you get a significant income from your rental property, the IRS may treat you as being self-employed in the vacation rental business.

Then you’ll have to pay self-employment taxes and income taxes. Self-employment taxes cover Social Security and Medicare contributions for income that you make when you are in business for yourself.

Learn About Applicable Occupancy Taxes

Some state and local governments impose lodging or occupancy taxes on short-term rentals. They vary from place to place and are usually charged and collected based on a percentage of the rental income paid by the guest.

Companies, like Airbnb, Booking.com,  and Vrbo, collect and submit the taxes in certain cities and states (they are mostly touristic centers).  But in less-frequented counties, some other taxes may also apply, so it’s better to check your local laws and regulations online.

Is Rent Tax Deductible?

If you receive rental income from your vacation rental property, there are certain rental expenses associated with running a rental property that you may deduct on your tax return. So when is rent tax deductible, and what can you do to maximize your tax deductions?

Your home must be classified as a full-time rental business. You should also keep your receipts and maintain strict and accurate records of your rental business purchases to allow for an easier tax season. In other words, you should treat your vacation rental property as a business, and that means you may need advanced automation software to streamline your processes.

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Vacation Rental Property Tax Deductions

You are entitled to deduct expenses connected with managing, maintaining, and conserving your rental business that the IRS considers ordinary and necessary. Ordinary expenses are those that are common and generally accepted in the business, and necessary expenses are those that are deemed appropriate.

There are plenty of deduction opportunities for your vacation rental business, including

  • Fees paid to property managers
  • Vacation rental platform fees
  • Mortgage Interest
  • Property management fees
  • Property taxes
  • Credit card interest
  • Rental taxes
  • Depreciation
  • Repairs & supplies
  • Cleaning & maintenance
  • Travel and transportation expenses related to your rental business
  • Insurance
  • Advertising
  • Utilities
  • Home office

According to Investopedia, if you use your vacation rental property for business and personal use, you’ll need to calculate the amount of rental expenses that can be deducted. You can do it by dividing or prorating the deductible expenses based on the number of rental and personal days.

Besides, there are vacation rental tax deductions under The Tax Cuts and Jobs Act:

  • A pass-through business tax deduction allows rental property owners to deduct an amount equal to 20% of their net rental income if they meet certain requirements.
  • New deduction for major improvements allows some vacation rental property owners to write off the cost of fire and security systems, HVACs, and roof replacement.
  • New bonus depreciation deduction allows you to deduct the full cost of personal property if you use it in business – including appliances and furniture – all in one year.

The Bottom Line

If you own a vacation home and rent it, you may be able to take advantage of certain tax benefits, thereby making a second home more affordable. But rental property tax rules are rather complicated. How you’re taxed and what expenses you can deduct will depend on the number of days that the vacation rental property is rented out each year and the amount of time you use the property yourself.

Failing to adhere to local tax legislation would be a costly blunder. Make sure you don’t make it, as well as the other popular mistakes of the STR business.

As an Airbnb or Vrbo vacation rental property owner, you should always be aware of your state and federal income tax responsibilities. And as rental taxation laws can change, you should always look for the most up-to-date information.

*Hospitable does not provide tax, legal, or accounting advice.  The information provided on this website is of a general nature. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice.  You are advised to consult with a legal counsel or a tax professional to get professional advice and take into account your specific situation.

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