In recent years, vacation rental homes have become one of the preferred travel options for jet-setters around the world — especially in the United States. Companies like Airbnb, VRBO, and FlipKey have created a vacationing model that is both affordable and comfortable, and this model also provides a more authentic experience for visitors and their families compared to a traditional hotel.
Despite the rise of this business model and the resulting profits, many owners don’t know that income from renting out their homes (or rooms in their homes) to vacationers is taxable, which could lead to complications come tax season.
Keep reading to learn five tax tips that could minimize or even eliminate taxes from renting out your home with Airbnb or a similar service.
1.) The 14-Day Rule
Vacation home renters don’t have to pay income taxes on their rental income if they meet two criteria:
- They rent the property for 14 days or less during the year, and
- They use the home for at least 14 days per year or at least 10% the total days they rent it out.
So, if you rent your home to vacationers 10 days per year, you don’t have to pay income taxes on the rental income if you lived in the home at least 1 day during that same year. This rule applies even if you are only renting one room in your house to vacationers.
Vacation rental companies are required to report all income received from rentals, so you might receive a notice from the IRS if you don’t include this income on your return. But if you stick to the 14-day rule, you shouldn’t have to pay taxes on vacation rental income if you can prove you qualify for the exemption.
2) You Can Deduct “Ordinary and Necessary” Business Expenses
Since vacation home rental owners use their property as a business, they can deduct “ordinary and necessary” business expenses. These expenses include purchases made to stock or improve their home for their clients, such as new silverware, toiletries, and even food or alcohol.
As with all business expenses, you should keep your receipts and maintain strict and accurate records of your rental business purchases to allow for an easier tax season and help protect against a potential audit. In other words: If you’re going to treat your home like a business, treat it like a business — no half measures.
3) File a W-9
Vacation rental home companies like Airbnb must withhold 28% of your rental income unless you complete and file a W-9 form with them. Rather than letting the IRS hold on to your overpayment, file the W-9 and keep your money, especially if you abide by the 14-day rule. Your effective tax rate will probably be lower than 28% in the first place (unless you’re making money hand over fist with your rental), but your rate will likely decrease even further once you file the W-9.
4) Deduct Service and Hosting Fees
Most rental companies charge service or hosting fees. Owners who rent their home or a room in their home for more than 14 days in a year should deduct 100% of their service and hosting fees from their income if those fees are entirely related to your private business expenses.
5) Self-Employed Individuals Must Pay Self-Employment Taxes
Most vacation home rental owners have day jobs that create the bulk of their income, but they also employ themselves in the context of their rental operation. As an employee of your own business, you’ll need to pay self-employment taxes in addition to the income taxes you pay on your primary income. Self-employment taxes go toward Social Security and Medicare, so while it might not seem fun to pay these taxes now, you should receive a return on your payments when you turn 65.
S.H. Block Can Help With All Your Tax Needs
Whether you are self-employed, own a small business, or live on a fixed income, S.H. Block Tax Services can help you file your tax returns to receive a favorable refund or minimize your payment amount. As you can see, many loopholes and procedures exist that can complicate the filing process for vacation rental homeowners, but our team understands these details, and we’re ready to put our knowledge and experience to work for you.
For help with all matters tax-related, including tax liabilities and resolution, please contact us to schedule a free consultation. You can call (410) 793-1231 or complete this brief form to book an appointment with one of our attorneys today. We pride ourselves on our empathetic approach centered around personalized attention, and we’re excited to meet you and get to work on your behalf.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.