Airbnb and VRBO have changed the way we travel. Real estate investors with extra rooms, second homes or other rental residential real estate now have new income opportunities beyond traditional long-term tenants. The travel industry suffered through the pandemic, however travelers are once again increasing the demand for short-term rentals. Experts predict that demand for short-term rentals will increase throughout 2022.
You must report income and pay taxes on the income you earn as a host. Before you start renting out your property as a vacation property, understand the tax implications. You must either report the rental income and expenses on a Schedule E or Schedule C. Schedule E is where you report income or loss from rental real estate. This income is not subject to self employment tax. Schedule C is where to report income or loss if you provide substantial services such as meals or daily cleaning services to your guests. Adding guest services, similar to a hotel, means that you are running a business and your net income is subject to self employment tax.
Rental losses are subject to limitations if you use your second home more than 14 days during the year or at least 10% of the total days rented. This amount of personal use of the property will limit your deductions to the amount of revenue collected. The good news is that if you rent your home for less than 14 days total, you are able to exclude that income from your taxable income.
To deduct expenses for your short term rental, you need to understand that you have direct expenses and indirect expenses. Direct expenses include your hosting fees, advertising, cleaning fees, and supplies. Indirect expenses include the mortgage interest, taxes, insurance, utilities, repairs and internet. These expenses must be allocated based on the percentage of personal use vs business use of your property. This is why it is so important to always track the number of days you rent the property and the number of days you use the property for personal use.
If you rent out a portion of your home as a short term rental, then you must allocate the expenses based on square footage of the rented space. If some of the spaces are shared for both personal use and guest use then you will need to have a reasonable method to allocate the business use of your property. It may be a combination of square footage and number of days rented.
Reporting short term rental income on your tax return can be complex. We are here to answer your questions. Set up a consultation with us to help make sure you understand all of the tax implications of earning income from short term rentals.
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