Becoming a short-term rental host on a platform like Airbnb can be profitable, but there are sneaky little things called taxes to think about. Understanding your tax obligations from the outset can save you from future headaches and maximize your profitability.

Reporting Your Rental Income

Once you begin welcoming guests, you are essentially running a business, and the income you generate is subject to taxes. If you rent your property for more than 14 days a year, you are generally required to report that income to the IRS. Depending on your earnings and the platform you use, such as Airbnb or Vrbo, you may receive a Form 1099-K, which reports the gross payment transactions you’ve received; however, this figure doesn’t include expenses like service fees or refunds, which you will deduct separately on your tax return.

What sort of hosting activities you do will determine where you report your income. Most hosts who provide standard amenities will report their income and expenses on Schedule E (Supplemental Income and Loss), but if you provide substantial services, similar to a hotel or bed and breakfast, such providing meals, your rental activity may be classified as a business. In this case, you would report your income on Schedule C (Profit or Loss from Business), which is also subject to self-employment taxes.

The “14-Day Rule”

When you let your property for 14 days or less in a 12-month period, you are not required to report the rental income to the IRS, but the trade-off is that you cannot deduct any rental-related expenses. It’s crucial to keep meticulous records of your rental periods to determine if you qualify for this rule. Even if you rent out your property for one week around a major sporting event and qualify for the 14-day rule, rental platforms may still issue a Form 1099-K, so you may need to address this on your tax return to show the income is not taxable.

Understanding Occupancy Taxes

Hosts are often responsible for collecting and remitting local occupancy taxes, such as occupancy tax, hotel tax, or lodging tax, which are levied by city or county governments. Some rental platforms may handle the collection and remittance of these taxes on your behalf in certain jurisdictions, but it is ultimately your responsibility to ensure compliance with local regulations.

Maximizing Your Deductions

One of the key financial advantages of running a short-term rental is the ability to deduct expenses related to the business, as these can significantly lower your taxable income. It’s essential to keep detailed records of all your expenditures. Common deductible expenses for short-term rental hosts include:

• Mortgage Interest and Property Taxes
• Utilities
• Cleaning and Maintenance
• Supplies
• Insurance
• Professional and Platform Fees
• Marketing and Advertising

Advanced Tax Strategy: Cost Segregation

A strategy known as cost segregation can offer substantial benefits. This is a study that identifies and reclassifies components of your property into shorter depreciation periods, so instead of depreciating the entire property over a standard 27.5 or 39 years, certain assets like appliances, landscaping, and carpeting, can be depreciated over 5, 7, or 15 years. It can lead to larger tax deductions in the earlier years of property ownership, which can significantly increase your cash flow as a short term rental landlord.

While the world of short-term rental taxes may seem complex, a proactive and organized approach can make it manageable. Making sure you fully understand your income reporting requirements, being aware of local tax laws, diligently tracking your expenses, and exploring advanced strategies means you can ensure compliance and build a successful and profitable hosting business. If you’re new to it all, be sure to have a chat with a qualified tax professional to understand how these rules apply to your specific financial situation.