Renting out your property on a short-term basis can be lucrative, but also comes with important tax obligations. This comprehensive guide covers everything you need to know about taxes on short-term rentals.
In this article we will discuss:
What is Considered a Short Term Rental?
The IRS defines short term rentals as rental agreements less than 30 consecutive days. This includes renting out rooms, apartments, houses, vacation properties, or other spaces on platforms like Airbnb, VRBO, and HomeAway.
How are Short Term Rentals Taxed?
Income from short term rentals is considered ordinary income and taxed at your normal income tax rate. You must report all rental earnings on Schedule E of Form 1040. Expenses directly related to the rental can be deducted to lower your taxable income.
Unlike long term rentals, short term rental income is generally not deemed passive income by the IRS, meaning it may qualify as active income for tax purposes.
The classification of rental income as active or passive makes a major difference for taxes. Active income and losses are treated differently than passive income and losses by the IRS. One key advantage of active income is the ability to deduct up to $25,000 in losses each year against your other nonpassive income. This can provide a significant tax reduction for investors. Additionally, passive losses can only be deducted against passive income while active losses can be deducted against any type of income. Some investors may specifically target short-term rentals that qualify as active income to gain these tax advantages. However, generating passive income may be preferential for some investors trying to build long-term, hands-off income streams. The right choice depends on your specific investing objectives and financial situation.
Qualifying as Active Income for Tax Benefits
One strategy to maximize tax benefits for short term rentals is to qualify the income as active rather than passive. Here's how:
Track time spent on tasks like communicating with guests, cleaning, maintenance, and management.
Be strategic and rent out your property during seasons when you can also personally use it for over 14 days.
Take on more hands-on roles like key exchanges and cleaning to boost participation hours.
Keep meticulous records of income and expenses in case the IRS ever questions if it is a business.
Meeting the material participation requirements to have your rental income classified as active rather than passive can open up significant tax advantages. For example, you may be able to deduct up to $25,000 in losses from the rental each year against other nonpassive income. Consult a tax professional to ensure you qualify.
Interesting Tax Facts About Taxes on Short Term Rentals
Taxes on short term rentals can get complicated. Here are some fascinating facts:
Airbnb automatically generates a 1099-K when hosts earn over $20,000 and have over 200 transactions.
Hosts who rent for less than 15 days at a fair market price don’t pay occupancy taxes in some areas.
Some expenses, like mortgage interest, can only be deducted if you personally use the home for more than 14 days or 10% of the rental days.
You may qualify for the home office deduction if you use part of your home exclusively for managing your rental.
Travel to prepare your rental property and time spent researching local laws can count towards the 100 hours needed to qualify as active income.
Frequently Asked Questions on Taxes for Short Term Rentals
Confused about how taxes work for short term rentals? Here are answers to some commonly asked questions:
What expenses can I deduct for my rental?
Allowable deductions include mortgage interest, property taxes, cleaning fees, utilities, repairs, insurance, management fees, and depreciation on the portion of your home that is rented out.
Do I have to pay quarterly estimated taxes?
Yes, you need to make quarterly estimated tax payments to avoid penalties for underpayment. Paying as you earn helps ensure you have the funds ready to pay taxes on your rental income.
How do I calculate depreciation for my rental?
For short term rentals, depreciation is calculated using the Modified Accelerated Cost Recovery System (MACRS). This allows you to deduct the cost of your rental property (excluding land value) over the standard useful lifespan defined by the IRS.
Do I have to report income if I only rent for a few weeks?
If you rent for less than 15 days and also personally use the home for more than 14 days or 10% of the rental days, you do not have to report the income.
How can my rental qualify as active income?
To have your rental income classified as active rather than passive, you must meet the IRS's material participation requirement by spending at least 100 hours/year managing your rental.
Putting It All Together - Short Term Rental Taxes
Taxes on short term rentals can be complicated, but also present opportunities to maximize deductions. Being proactive by tracking expenses, estimating quarterly taxes, and working with a tax professional can help ensure you stay compliant and reduce your tax burden. If you still have any questions or would like personalized advice on how to structure your short-term rental taxes, Please connect with for a tax analysis. Our experienced team specializes in taxes for short-term rental hosts and other real estate investors. We can provide tailored recommendations to help you take advantage of all available deductions, accurately report your income, qualify as an active rental, and reduce your tax liability. Reach out today to get started optimizing the taxes on your short-term rental.
