Vacation Rental Taxes Explained

Renting out a property you own as a vacation home or Airbnb can be a great way to earn extra income. It can also be a bit complicated to manage on your own—aside from paying income tax on your earnings, you also have to navigate local ordinances that can make for a wildly different set of tax and management rules from city to city and state to state. Let’s dig in on some details regarding taxes you’ll want to know if you are getting in on this fast-growing industry.

What vacation rental owners need to know about rental taxes

Whether you’re an Airbnb Superhost or giving the market a go for the first time, it can be helpful to consult a tax professional upfront before taking on a new rental venture. It’s much easier to ask a few questions and ensure you’re doing everything correctly the first time than to end up having to answer questions from the IRS later on. Here are a few things you should keep in mind and deductions you can ask your accountant to minimize your tax rate and maximize your earning potential.

The 14-day rule lets you earn from short-term rentals tax-free—to a point

Homeowners, rejoice: if you want to capitalize on an event in your city to make bank during a two-week period, you don’t have to pay tax on that income. Here’s the fine print: If you rent out a property for 14 or fewer days per year and you also use that property for personal use for more than 14 days (or at least 10 percent of the time you’ve rented it out for others), you don’t have to claim it on your tax return as income. 

This is true even if you rent it out through a platform like Airbnb, Vrbo, Booking.com, or a similar vacation rental site, and even if that platform reports the income to the IRS. Make sure you have clear evidence that you meet the terms of the 14-day rule, as once the number of days exceeds 15, you’ll have to pay taxes on the entire rental income. 

Visits by your family members count as personal use

For tax purposes, any personal residence used by family members, such as your spouse, kids, siblings, or parents, counts as use for personal purposes. This remains true even if you are the sole homeowner and did not personally use the residence throughout the year. This is a valuable tip if you have a property you’d like to rent out for just those 14 tax-free days but cannot personally use it during the same tax year. 

You can deduct certain rental expenses on your tax return

If your property doesn’t fall under the 14-day rule and is classified as a rental property, you’ll be able to deduct certain expenses from your tax return. For example, deductible expenses for property owners may include:

  • Any service fees you pay to the booking platform.
  • Any supplies for your vacation rental property, such as bedding, appliances, dishes, etc.
  • The percentage of mortgage interest, home insurance, or property taxes that’s proportional to the rental use of the property.  

Local ordinances on occupancy tax and property use are different everywhere

With the rise of Airbnb and similar platforms, many cities and towns have levied their short-term rental regulations to prevent the housing market from becoming too competitive for actual residents. For example, in some cities, you may have to collect an occupancy tax or lodging tax from your guests; in others, you may be limited to how many days you can rent out the property through a booking platform; some may require you to get a special license for your rental business, and in others, it may be completely against the law. Don’t assume the federal tax laws for the 14-day rule apply to your city regulations, too—even if it’s not taxable income, you may still have to pay local taxes if that’s the rule in your area.

It’s vital to research those local laws and follow them. Otherwise, you could be forced to cease renting your property, and that otherwise consistent rental income could be at stake. 

You may have to pay self-employment tax

If you make a significant amount of income from renting out your property on Airbnb, IRS rules might treat you as self-employed in the vacation rental business, according to TurboTax. Suppose you’re unsure whether this applies to you. In that case, it may be best to consult a tax professional who can help you understand how to classify your property, how to count your rental days, and what should go on your Schedule C—your self-employment income form—and so on. TurboTax also offers a calculator for short-term rental homeowners you can use as an estimation tool for tax purposes. If you need advice, consider seeking it out straight away, well before tax season, so that any changes you need to make to the structure of your rental business don’t stretch into the following tax year, too.

You can use a rental loss to offset other taxable income

Rental tax rules permit taxpayers to claim a loss from a rental property—such as expenses for outfitting a new Airbnb that exceed your total rental income that first year—to offset other income on your tax return. Again, you may ask a tax professional to double-check your rental tax deductions and make sure you’re classifying everything correctly before you file, especially if you’re new to rental properties. 

Invest in rental properties more easily with Arrived

One of the easiest ways to invest in real estate and reap the benefits of consistent rental income is to buy shares of rental properties through Arrived. You can start with an investment of virtually any size, and you won’t have to navigate real estate taxes or rental taxes alone. 

Arrived’s dedicated property management teams will handle all the ins and outs of finding tenants, paying home insurance and property taxes, collecting rent, and managing repairs and maintenance. All you have to do is collect your dividends and watch your investment grow. Check out available homes and see how your investment could appreciate with time.

Disclaimer:

“The above is a summary for general information only, and does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular investor in light of its investment or tax circumstances, or to investors subject to special tax rules. Additionally, this summary does not address state, local or non-U.S. tax considerations. The tax consequences to any particular investor of any investment offered on the Arrived Platform will depend on the investor’s particular tax circumstances. You are urged to consult your tax advisor regarding the U.S. federal, state, local and non-U.S. income and other tax consequences to your, in light of your particular investment or tax circumstances, of acquiring, holding and disposing of investments offered on the Arrived Platform.

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