Short-Term Rental Taxes: Know what you owe before you rent your property.

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It’s summer, which hopefully means you are bound for the beach or other destination soon. If so, my guess is that you spent at least some time investigating short-term rental housing. That’s certainly become the “it” way to travel, hasn’t it? Unique homes that are part of an actual neighborhood are just a lot more appealing than predictable, traditional hotel rooms. Sites like Airbnb, VRBO, and HomeAway have made finding these homes a breeze, and it’s often cheaper to travel this way. I personally really like it.

If you’re renting your property this way, you’re likely a happy camper, too. Our clients who do say they love the flexibility and savings realized by foregoing the services of a traditional property management company, and the bump in income is certainly a benefit. But one thing that can be a little confusing is the taxes. Too often overlooked, income, sales, and lodging taxes are all part of renting out a room or home on a short-term basis. If you’re making money this way, you need to pay attention.

First, know that “short-term rental” means different things in states. For most, a short-term rental is one that lasts less than 30 days. For others, it’s 90 days. In Florida, where “snowbirds” flock in winter, a short-term rental is defined as up to six months. How your state defines short-term is important, because it affects the taxes you must pay. Get with your tax professional to make sure you’re starting from the right place.

Taxes on Your Short-Term Rental

Income Tax

Most short-term vacation rentals do not have taxable income. That’s because renting a property on a short-term basis is typically intended to offset the mortgage or other costs of home ownership. Even if you come out ahead, you can deduct depreciation expense, mortgage interest, real estate taxes, cleaning/maintenance, insurance, utilities, and more that can put you in a loss position for income taxes. You absolutely need to report the income, but you likely won’t owe tax on it.

The basic rules that will cover most vacation rental situations are covered here, in our FAQ section.

Sales and Lodging Taxes

These are the most overlooked and misunderstood by property owners, and some have never even heard of them. Sales and lodging taxes are taxes on the gross rent collected from guests. Short-term rental owners must collect and remit these taxes to the proper agencies, just like hotels have to. In fact, the sales and lodging taxes will be identical to the nightly hotel tax rate in any given location.  And it’s typically pretty steep, about 10-15% of the gross rent collected, which is a significant amount of money each year. If you’re not compliant over several years, the dollar amount can build into the tens of thousands. It is therefore critical that you stay on top of sales and lodging taxes if you’re renting out your home on a short-term basis.

What really complicates lodging taxes is the fact that there are often different city, county, and state taxes that apply to each rental. Essentially, there are multiple levels of government each applying a separate tax, and you need to keep track of all of them. And if you have multiple homes in different locations, things will get very confusing very quickly. This is just one reason we encourage rental property owners to work with qualified tax professionals and not go it alone.

Sales and lodging taxes are a type of gross receipts tax and, unlike income taxes, there are no deductions.

Permits

Permits fall into the “fee” category more than the “tax” category, but we feel they are worth mentioning. It is essential that you register with the city, county, and state agencies that administer taxes so that you’re not fined down the line for operating without a business license, a rental permit, or other required documentation. The kinds of documents you need are generally easy to find on tax agency websites, so please don’t neglect to do it.

Owning a short-term rental property can be a rewarding experience. Just stay on top of the taxes to ensure it remains a lucrative endeavor.

 

Do you own rental property? What challenges do you face? Comment below!

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