Vacation Rental Accounting: Tax Essentials for Hosts
Explore essential tax tips for vacation rental accounting. Learn about deductible expenses, tax laws, and financial returns for vacation rentals.
Ugh, taxes. Every host's nightmare but a vital part of a sustainable business. While running a short-term rental company may be profitable and rewarding, you must pay Uncle Sam your fair share of taxes. Vacation rental accounting can be chaotic, but we're here to help you keep as much profit as possible in your pockets.
In this article, we'll share everything you need to know about vacation rental bookkeeping for properties in the US. If you rent vacation homes in other parts of the world, we advise you to research each country's tax regulations to avoid implications.
Do I Have to Pay Taxes as a Short-term Rental Host?
To understand whether you need to pay taxes as a property owner, you first need to decide how you'll use your rentals — there's a difference between personal residence and short-term rental use.
According to the Internal Revenue Service (IRS), when the house is used by the owner, their family or friends, other property owners, and their families, it's considered personal use. At the same time, paying less than a fair rental price is also considered use for personal purposes. The safest way to determine personal use is the 14-day or 10% rule.
14-Day or 10% Rule
According to the US tax authorities, if you rent your properties for 14 days or less in a year or for 10% or less of the total days you rent it to guests, it's considered personal residence. In that case, you don't have to report your rental income, and there's no limit to your earnings. Also, you can't deduct any expenses from running your business, but you can deduct mortgage interest and property taxes.
On the other hand, if you rent your vacation home for more than 14 days yearly, or 10% of the days it's rented, you should report your rental income. In any scenario, you should consider days spent working on your property's maintenance and repair. These don't count toward the 14-day mark, even if your family used the house for personal use on the same days.
Do I Need to Register With Tax Authorities?
Short-term rental hosts must register with the appropriate tax authorities in some jurisdictions. This involves obtaining a business license and legal registration to operate your vacation rental property. However, you'll have to check with the local tax authorities of your State or county.
What Are the Types of Taxes for Short-term Rental Hosts?
Depending on location and local laws, short-term rental hosts may be responsible for several types of taxes. The most common taxes include income, occupancy, and sales taxes.
Rental Income Tax
Rental income earned through platforms like Houfy is typically subject to income tax. Hosts must accurately report their rental income and any deductible expenses. It's important to keep records of each rental, including dates, rental amounts, guest names, and fees paid through Houfy.
Occupancy Tax
Many cities and states impose an occupancy or transient occupancy tax (TOT) on short-term rentals. The tax rate and requirements for collecting and remitting it vary depending on the location. Some cities require hosts to register with a local tax authority and collect tax from guests, while others leave it to OTAs to collect and remit the tax on behalf of hosts.
Sales Tax
In some jurisdictions, short-term rental hosts may have to collect and remit sales tax on their rental income. The sales tax depends on the total amount paid by the guest, including any cleaning fees or additional charges.
Self-employment Tax
If you rent your property short-term and offer services, there's also a chance to classify as self-employed and have to pay self-employment taxes in addition to your rental income tax. This is mostly to cover Medicare and Social Security for your business-generated income.
As a vacation rental host, you should always be aware of your State's tax regulations. That's why the National Association of Realtors created this Short-Term Rental Tax Rate Chart by State, which makes finding the information you need easier. It's also highly advised to consult with a tax professional who can provide guidance based on your specific situation.
What Are Deductible Expenses for Short-term Rental Hosts?
Short-term rental hosts may be eligible to deduct certain expenses for running their rental property. However, keeping accurate records of them is essential for claiming those deductions, which might include:
- Accounting and legal fees: any fees you spend for qualified tax or legal professionals
- Marketing costs: advertising costs or salaries from hiring marketing professionals
- Utilities: electricity, water, internet, and other bills
- Maintenance and cleaning services: salaries for cleaners or other professionals repairing your home, as well as tools and materials purchased for vacation rental maintenance
- Insurance and taxes: insurance costs and property taxes paid for your rental property
- Toiletries and supplies: expenses for supplying your vacation rental for each new guest
- Service fees: online travel and booking agencies' fees
- Software: any software you use for vacation rental accounting, property management, and overall guest experience
- Mortgage interest: interest paid on the mortgage for your rental property
- Transportation expenses: if your rental is your principal business location, you can deduct traveling expenses for rental income collection and property management
Tax Tips for Short-term Rental Owners
1. Keep Detailed Records of Your Rental Periods
As you can see, the 14-day mark makes a huge difference whether you must report your rental income and pay taxes. So be sure to record when you rented your property to guests, kept it for personal use, and spent time doing repairings and maintenance.
2. Track Your Business Income and Expenses
If you want your vacation rental business to succeed, you've got to keep track of your income and expenses. Since you can benefit from deductions from ordinary costs of running and maintaining your rentals, keeping a record of them is crucial. Don't postpone it until the last minute when you'll rush to meet deadlines or risk making mistakes.
3. Fill in a W-9 Form
If you've listed your properties on vacation rental platforms, you must fill in a W-9 form. This allows the platform to give you full access to your income. Otherwise, they're obligated to withhold 28% of it, and since your tax will most of the time be less than 28%, you'll be missing out on payments.
4. Learn About Your State's Laws
As property managers, being familiar with the local laws of short-term rentals is critical to staying compliant with regulations. Some States are stricter than others regarding rental income and taxation. For instance, they might impose hotel taxes even on vacation rentals, so hire a professional accountant to guide you and ensure you comply with the rules of homeowners' associations (HOA).
Get Your Vacation Rental Accounting in Place
Running a successful rental business and managing tedious tasks like vacation rental accounting can be intimidating. However, it's vital for the longevity and legality of your business, which can lead to your long-term success.
As a short-term rental host on platforms like Houfy, you may be obligated to collect and remit various taxes from your guests, involving informing them about the tax amount before they make a reservation. Houfy provides hosting solutions that allow hosts to collect taxes directly from visitors. In cases where automated tax collection is unavailable, hosts can collect taxes through special offers or other means.
If you're not on Houfy yet and want to benefit from a book-direct solution that doesn't charge extra fees on top of taxes, it's time to join a community of more than 68,000 members. List your property today and regain control of your business and income.
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