Top Tax Tips For Air BNB and Vacation Rentals 2023

Budgeting / By Humbled Budget

Humbled Budget Team

With over 55 years of combine experience in the Finance/Tax Industries based in the United States, Our Team of Humbled Individuals' shares their wisdom gained through experience or technical knowledge acquired through Additional Education.

Introduction

I used to think that being a good host meant having comfortable beds and clean sheets. However, after running my own Air B n B business for several years, I discovered something else: people who are perfect hosts also know their tax rules.

I got on board with sharing some of my best tips. After all, there’s nothing worse than getting an unexpected bill from the IRS at tax time.

Learn about the 14-day rule

The 14-day rule means that the IRS considers it a personal expense if you rent a room in your homestead for less than 15 days.

If you want to deduct the cost of renting a room, you’ll need to ensure it’s rented out for at least two weeks.

If you rent a room in your house and taking advantage of this tax, Here are some things you should know during your break:

First, any expenses related to running your vacation rental business can be deducted from your income taxes as long as they’re for deductible business purposes (like advertising or travel).

The IRS does not require that these expenses be directly related to maintaining the property itself, only that they support this activity.

For example: If your marketing strategy involves driving around town with an eye-catching sign to attract customers or clients who might stay at your place, that would be considered deductible.

Learn about exceptions for rooms

If you rent a room in your home, you may not have to pay tax on any income you receive. If the rental is for nine months or more, it’s considered a business and not part of your residence. There are two options in this case: either file as a business and pay taxes like any other business owner would do (more about this later) or declare yourself an individual homeowner and report it as a side income. This means less paperwork, and your profits will be taxed at higher rates since they’re considered personal rather than professional/business income.

There are also exceptions for short-term rentals that can help reduce some of the burdens of paying taxes on vacation rentals; if you rent out a room in your home for less than 14 days per year, then it’s usually considered “incidental” and doesn’t have to be taxed at all.

If you receive an IRS letter, don’t freak out.

If you receive an IRS letter, don’t panic. Unless your profit from your vacation rental business, there’s no way they could find anything wrong with it.

If you make a profit in your Air B n B or vacation rental business, it’s unlikely that the IRS would audit you for less than $1,000.

If they do an audit and find less than $1,000 of profit for any tax year, that might be enough to have them come in and check things out again.

Keep flawless records of rental periods.

To ensure taxes are properly filed, it’s important to keep meticulous records of all your income and expenses.

Keep a calendar of dates and rates for each booking. You can use this as a reference when filling out Form 1099-K at the end of the year.

Then, create a spreadsheet to track income and expenses for your Air B n B or vacation rental business. There are numerous free templates available online—p with this process.

It’s also helpful to print out a receipt for each booking (or email confirmation for non-cash transactions). This way, it will be easy to refer back to an expense during tax season.

Document all business expenses

You may be able to deduct any ordinary and necessary expenses related to your rental income, but only if you itemize deductions.

That means you’ll have to keep track of all business expenses and receipts. You may also have to track the mileage on your cars if you use them for personal or business purposes (including driving around looking for vacation rentals).

If you work at home and check out new rentals, keep track of the time spent on each activity so that you can deduct the appropriate amount of depreciation on your equipment.

Apportion mortgage interest and taxes if you rent room only

If you rent a room or space in your home but not the entire property, it’s essential to apportion your mortgage interest and taxes.

To understand how to do this, let’s look at an example: if you have a $200k mortgage on your home and the rental unit is worth $100k, then the owner would be entitled to 100% of the mortgage interest and taxes.

If you paid off 30% of that debt before renting out the room (refinancing), then your tenant would be responsible for paying 30% of those expenses.

Fill out Form W-9 Taxpayer Identification Number

If you are an individual and are required to furnish a taxpayer identification number (TIN), provide your correct name, mailing address, and other requested information.

If the company is a corporation or a partnership, provide the information for the principal officers of that organization.

Deduct the guest-service or host-service fees

Guest-service fees are considered taxable income.

Host-service fees, on the other hand, are not taxable income.

Host-service fees can be deducted as a business expense.

Host-service fees can also be deducted as a travel expense if you’re using your home for work travel (e.g., if you rent out space in your home to someone who visits on business and pays for their lodging).

Learn about applicable occupancy taxes

Air B n B is a taxable activity. That means that you, as the host or owner of an Air B n B or vacation rental, are responsible for collecting applicable occupancy taxes. The host usually manages occupancy taxes and applies them to their state’s sales tax rate.

Tax rates vary by location, but most states charge at least 5% of the rent guests pay for each stay night.

Some cities have higher occupancy tax rates than others; these vary from city to city based on the size of your property (for example, one unit vs. four units) and its location in the town itself (the closer your property is located in proximity to downtown business districts or other tourist destinations will raise its value).

Some states also have exemptions for short-term rentals, typically less than 30 days which may mean you don’t have to collect any additional taxes at all.

Pay self-employment taxes

You’ll need to pay self-employment taxes if you earn $400 or more as an independent contractor. The self-employment tax rate is 15.3% (the combined rate of Social Security and Medicare).

You can determine how much you owe by multiplying your net earnings by 0.153. For example, if you make $1,000 in a month:

$1000 * 0.153 = $153
Total annual income tax rate: approximately 15%

Being a good host is more than having comfortable beds and clean sheets

As a host on Airbnb, you may be responsible for paying taxes on your income and expenses. Depending on where you live and the structure of your home-sharing business, you may also have to pay taxes regarded to the quality of your property home or business property.

You’ll need to determine which tax rules apply in your area by looking at all relevant state and local regulations.

Suppose you’re not sure how much information you need to provide. In that case, this article can help guide you through the process of determining what is considered taxable income (for example, rental income), expenses that are deductible from rental income (for example, mortgage interest), as well as other sources of taxable income (for example capital gains).

Conclusion

The main takeaway is that being a good host is more than having comfortable beds and clean sheets.

It’s about knowing the rules, so you don’t get surprised at tax time. We hope these tips help make hosting your Air B n B or vacation rental a little easier.