Tax on rental income: Tax guide for Airbnb, VRBO, and other short-term rental hosts
8 min read
January 29, 2024 • Block Advisors
Renting your home, apartment, or spare room on Airbnb, VRBO, and other similar platforms is a great way to make extra cash. But before you list your space, it’s important to know your tax responsibilities as a short-term rental host. Keep reading as we outline tax reporting for rental income, answer hosts’ common questions, and share a few hosting tax tips.
Do you pay taxes on rental income?
If you rent your house, apartment, or spare room for more than 14 days in a year, you may be required to pay taxes on the income you earn. Once you host your space, you are considered a landlord and, therefore, will be responsible for state and federal income taxes. All income must be reported on your tax return, but the general associated expenses can be deducted from your rental income.
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The IRS 14-day rule
The 14-day rule is important for anyone considering renting out their space. This rule, sometimes called the “Master’s exception,” essentially determines whether you must report rental income. Under the 14-day rule, the Internal Revenue Service says you do not have to report any rental income on your short-term rental if you:
- Rent the property for no more than 14 days during the year AND
- Use the rental yourself during the year more than the greater of:
- 14 days or
- 10% of the days the property is rented at fair rental value.
If you meet both criteria, you won’t have to report the income on your taxes, and you can’t deduct any expenses as rental expenses.
How to report income from Airbnb, VRBO, and more
If you don’t meet the requirements of the IRS 14-day rule, then you will need to report income on your tax return. Your first step is to determine where the rental income should be reported. There are three different classifications for income reporting:
- Schedule E rentals: A Schedule E rental is the most common rental classification. You will report your income here if you, as the host, do not provide “substantial services” to your guests.
- Schedule C rentals: Your rental will be classified as a Schedule C rental if you provide substantial services to your guests. Income from this type of rental is subject to self-employment tax.
- Non-taxable rentals: As explained above, you will have a non-taxable rental if you meet the requirements of the 14-day rule.
Once you determine which type of rental you’ll be reporting income for, you can begin preparing your tax documents.
VRBO and Airbnb tax documents
Depending on your taxpayer information, number of transactions, state laws, and total amount you make, you may receive two IRS forms from the rental service: 1099-NEC and 1099-K. You will be sent a 1099-NEC form directly from Airbnb if you make more than $600 yearly from a single client. The income thresholds for these forms may differ depending on the platform you use to host.
Form 1099-K reports the gross payments received during the year. The rental platform you use will send this form to the IRS and to hosts who meet certain criteria. For example, Airbnb will send you a copy of the form if you earn more than $20,000 in gross revenue and have over 200 reservations by the end of the year. If you receive a 1099-K, you will have to report the exact amount listed in Box 1a of the 1099-K and then deduct your expenses on the appropriate form.
Regardless of whether or not you receive a 1099-K form, the rental income you earned is generally reportable on Form 1040. Note that the gross amount reported to you will exceed the amount paid out to you by the platform. The gross amount does not include refunds, service fees, and adjustments. These will instead be accounted for as deductions on your tax return.
It’s also recommended that you fill out a W-9 form. Airbnb, VRBO, and other similar rental companies must withhold 24% of your rental income if you don’t provide them with a W-9. Once you fill out the form, the rental company can stop withholding your income and give you immediate access to the maximum amount of rental income.
Substantial vs. insubstantial services
Unsure if your rental is classified as Schedule E or C? Here’s a breakdown of substantial and insubstantial services.
Substantial Services (Schedule C):
- Cleaning of the rental property while occupied
- Concierge services
- Guest tours & organized outings
- Meals and entertainment
- Other “hotel-like” services
Insubstantial Services (Schedule E):
- Heating and AC
- Water and gas
- Internet and Wi-Fi
- Repairs and maintenance
- Trash collection
- HOA payments
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Short-term rental tax deductions
If you are required to report rental income, you will be glad to know that you can deduct certain expenses to lower your tax liability. Related expenses you can deduct include:
- Cleaning and maintenance fees (including any laundry or cleaning supplies you purchase yourself)
- Property insurance and private mortgage insurance (PMI)
- Service fees: Short-term rental companies often charge a percentage fee (guest-service or host-service fee) that is taken off the top of the rent that guests pay. If the company sends you a 1099, it includes the amount of service fees. Since 100% of the fee was directly related to the rental use of the property, you can and should deduct the entire amount paid.
- Utilities (water, gas, electricity, internet, TV, etc.)
- Repairs (including furniture and appliances)
- Mortgage loan interest
- Depreciation: You can take depreciation on the portion of the place you are renting for the period you’re renting. If renting just a spare room, you can take a proportionate deduction for the expenses of your entire home based on the size of the area and the rental period.
Note that if you personally use the property, you will have to allocate certain expenses, such as your mortgage interest, property taxes, and utilities, between any personal and rental use.
Does hosting on Airbnb or VRBO make you self-employed?
Many short-term rental hosts are not considered self-employed. However, as mentioned above, if you are providing substantial services to your guests, you will be seen as self-employed in the eyes of the IRS. If your rental looks more like a traditional bed & breakfast or provides hotel-like services, you will have to pay self-employment tax as well as rental tax.
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4 tax tips for short-term rental hosts
Other than taking advantage of all possible deductions, here are some more useful tips for Airbnb, VRBO, and other short-term rental hosts.
1. Keep detailed records of rental periods
If you run into tax issues or trouble with filing, you’ll be much better off if you treat your rental like a business and keep detailed records from the beginning. Keeping records of rental periods will also help you keep track of whether you’re meeting the requirements for the 14-day rule or not. It’s also helpful to keep meticulous records of rental periods longer than 14 days so you can accurately divide out personal and business expenses.
2. Document all business expenses
Similarly, it’s important to document all your business expenses thoroughly. When it comes time to take deductions, having clear records of all the money spent on your business will make filing easier and won’t require you to go back through credit statements for proof for the IRS.
3. Know about applicable occupancy taxes
Depending on where you live or where your rental is, you may need to collect occupancy tax from your guests. Occupancy tax – often referred to as tourist tax, hotel tax, room tax, or lodging tax – is a tax that the visitor is required to pay when they rent a property. The rates and rules for this tax vary widely, so read up on your local occupancy tax rules before you list your space for rent.
4. Don’t worry if you receive an IRS letter
Because of reporting laws, some rental companies may report all income you receive to the IRS, even if you rent your place for less than 2 weeks. If this happens and you don’t include the income on your tax return, the IRS may request information about your short-term rental. But don’t worry. Your records of rental activity will show that you met the requirements for a non-taxable rental.
Short-term rental hosting: The bottom line
Renting a house, apartment, or spare room as a short-term rental is becoming increasingly popular. It may seem like a self-explanatory process, but there are some nuances to be aware of before jumping in. That’s why Block Advisors is here to help.
Owning a small business comes with many rewarding challenges and responsibilities, even before adding tax laws and forms into the mix. Block Advisors can help you with your small business needs, from bookkeeping services and payroll to small business tax preparation and beneficial owner reporting.
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