Short-term rental properties are very popular right now. You see them on mobile apps like Airbnb, VRBO, HomeAway, and more. They can be a great way to make extra income. What some new landlords forget, however, is that their short-term rental income is often still taxed as income, similar to income that they would receive at a nine-to-five job.
Below is the need-to-know tax information related to income and renting out your home or other property on a short-term basis.
What Is Considered Income?
Not every dollar in the door is going to be considered income if you rent out your home. There are a few exceptions that might be helpful.
The 14-Day Rule
The “14-day rule” allows you to get some income completely tax free if you meet certain qualifications, including:
- You have rented out the property no more than 14 days during the entire year and
- You use the home yourself for 14 days or more during the year, or at least 10% of the total days that you rent it to other people.
By keeping your rentals under 14 days, you can gain income without having to pay any additional taxes on that income at all. However, that also means that you cannot deduct any of the expenses associated with keeping up the space, either.
Renting Out Your Property Past 14 Days
If you are renting out your property or another property for more than 14 days, even if it is just 15 days, then the income that you made from that rental is taxable. However, the income that comes in the door is decreased by the expenses that you used to maintain the rental.
Short-Term Rental Expenses
If you do not pay income tax on your rentals because you meet the 14-day exception, then you cannot deduct any portion of your expenses. Once you cross that 14-day line, then you can generally deduct your expenses if you are an active manager of your property, but there are some restrictions.
Many short-term rentals are either standalone structures or rooms in your own home (or that is attached to your home). When you have a standalone rental, deducting expenses is much more straightforward. You can deduct every expense related to the rental from your income. This includes things like:
- The Full portion of any mortgage paid
- Mortgage interest
- Utilities paid
- Maintenance bills
- Legal fees
As long as the money went into your rental property, then you should be able to deduct it.
When a rental is part of a home, chances are that it will have some expenses that it shares with the rest of the house. Mortgage expenses, for example, will have to be divided out to account for the portion of the house that is rented out. If you have a 100-square foot room that you rent out in your 1000-square foot home, then you will be able to deduct 10% of the mortgage expense if you rented out that room every day for a year.
If you did not rent that 100-square foot room out every day, you will need to determine the percentage of the year that the room was rented. Then, you can deduct that percentage. For example, if you rented out the room 50 days of the year, that is about 14% of the year (50/365 = 13.7%). That means you can deduct 14% of the 10% of the mortgage for the home. If your mortgage was $500 per month or $6,000 per year, then $600 ($6,000 x 10% = $600) per year is the portion of that room, and 14% of $600 is $84. That $84 is the expense that you can deduct from your rental income to decrease your tax expense.
Active or Passive Rental Income
Many people who are renting out rentals on a short-term basis are actively engaged in the rental. Being “active” often includes doing things like:
- Cleaning the rental when it is occupied
- Changing the bedsheets or linens when the rental is occupied
- Providing meals and entertainment (bed and breakfast arrangements, for example)
- Providing transportation
- Giving any other “hotel-like” services
From a tax perspective, you actually may not want to be considered “active” because that can increase your tax obligation. If you are a “passive” renter, then you will use Schedule E, rather than Schedule C, to report your income. This is important because those who report income on Schedule C are subject to self-employment tax. Passive renters do not have to pay this tax.
You can still provide some services to your renters and be considered a passive investor. These items include providing things like:
- Heating, air conditioning, and other utilities
- Basic cleaning of common areas
- Repairs and maintenance
- Trash collection
Whether you are considered a passive investor or an active rental owner can also affect how you report your expenses and even how you deal with losses (rather than income).