1. Take advantage of “The Masters exception”
If you’re renting out your home for only a couple weeks a year, it truly is a side gig. The IRS recognizes this with the 14-day rule. This rule is widely known as “The Masters exception," named after the practice of renting out homes in the town of Augusta, Georgia, for a short period during the major golf championship known as The Masters. Under the 14-day rule, you aren’t required to pay income tax on money earned from a short-term rental, provided you:
- Don’t rent the property out for more than 14 days in one tax year AND
- You establish the vacation house as a dwelling unit by using it yourself for the greater of: 14 days or 10% of the total number of days that you rent it out to others.
You might be tempted to rent out your vacation home multiple times a year. But by the time you consider the taxes you’ll pay on the extra income, plus the time you’ll spend keeping track of deductible expenses, you might find it makes more sense to keep the rental time under the IRS’s 14-day limit.
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2. Treat it as a business
Allowing people to occupy your property for a short time might feel like just another use of your personal space, but for tax purposes it’s important to treat your vacation rental as a business. That means keeping careful records from the very start.
If you decide to stick to the 14-day rule, be sure to keep records of both the days you rent the property out and the days you occupy it yourself to establish it as a dwelling unit. If you choose to rent your property beyond the 14-day limit, record the exact rental dates so you can accurately separate personal expenses from business expenses when it comes to things like mortgage interest.
3. Track your expenses
You can offset some of your taxable rental income by deducting your “ordinary and necessary”[HS1] operating expenses. From the extra key for FlipKey to the new bed for Airbnb, the things you purchase for your vacation rental may be deductible business expenses. Separating your rental receipts from your personal ones and keeping track of each and every business expense as it is incurred will speed up your tax preparation and save time (and possibly money) should the IRS ever ask for proof for your deductions.
4. Check into occupancy taxes
Income tax is not the only tax to keep in mind with your short-term rental business. Many states, counties, and municipal governments place occupancy taxes on vacation rentals. The rules and rates for these taxes often vary a great deal from one area to the next. The names can vary, too: some are called hotel taxes, others are referred to as lodging taxes, and a few are known as transient occupancy taxes.
As the rental proprietor, you may be obliged to collect your locality’s occupancy tax from your visitors and submit the amount to your local tax authority. However, some vacation rental companies, including Airbnb, may collect the taxes and submit them on your behalf in certain states and cities.
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5. Check out the self-employment tax
With a vacation rental, you’re in business for yourself, and you’re actually paying yourself for making bookings, providing amenities, and maintaining your property. If you provide substantial services as part of your rental arrangement, you might be required to pay self-employment taxes. Like traditional payroll taxes, self-employment taxes fund Social Security and Medicare. When you’re self-employed, you pay both the employer and employee parts of these contributions.
These are only a few of the tips for offsetting the profits from your short-term rentals. To learn about other tax tips for Airbnb, HomeAway and VRBO vacation rentals, visit TurboTax.com.