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Short Term Rentals and Income Taxes


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This article is based on tax law within the United States. While I am not an accountant nor a tax professional I have rented properties both long term and short term for several years. The information presented below is gleaned from working on my own taxes and consultations with my accountant.

Income Taxes and Rental Homes

Like the saying goes, there's nothing more sure than death and taxes. Almost any income you earn within the United States is taxable, thus rental income, whether it be renting a room in your home or an entire house, is taxable. Some rental listing platforms like Airbnb will provide you with a 1099-K if you are paid over a certain amount. To err on the side of not receiving unexpected tax bills some year in the future, you should expect all of the platforms to report your earnings to the IRS and you, in return, should report your income too.     

Is 100% of My Short Term Rental Income Taxable?

You should include 100% of your rental earnings when you file your taxes. Hiding income will eventually catch up to you and could earn you a nice little tax bill with penalties and interest. Recently i received an IRS notice about owed taxes including penalties and interest for three years ago. Of course, the IRS was wrong and I was able to prove that, but it's not nice to receive a $26,000 bill unexpectedly!

With that said, if you keep good records, you should be able to reduce your tax liability significantly and not owe taxes on 100% of the earned amount. Because short term rental is a business it is subject to many of the tax deductions other businesses enjoy.

Tax Deduction Ideas

Room Rental

We'll start with someone who is renting a room within their primary residence. You may take a deduction based on the square footage of the room that you are renting if that room is used solely as a rental room. In other words, you can't use the room for other purposes while it is not rented. It needs to be dedicated. You cannot deduct for shared spaces. Once you have determined your dedicated space you can take the square footage of that space and calculate its percentage of the entire home. Next calculate the percentage of time that the room was occupied during the tax year. You can now deduct from your electric, water, gas, internet and TV bills based on the combined percentages.

You also cannot deduct for items you purchase for the rental but also use yourself. Some homeowners provide items for the guests; a good example is coffee. If you purchase a can of coffee that both you and your guests use from then you cannot deduct it. You can, however, purchase a can of coffee and keep it for guest use only, thus making it deductible.  

Entire Home Rental

When I talk about "entire home rental' I am referring to a home that is used 100% as a rental property, not one that you vacate while guests are present and live in yourself when it is not reserved.

Closing costs are deductible if you purchase a home with the purpose of renting it. You can also claim standard depreciation which is typically 25 years.

Most of the bills associated with the home become tax deductible too; items like electricity, TV, internet, gas, etc. because they are business expenses. Anything you purchase for your guest's use is deductible: beds, tables, chairs, linens, food, as well as items used in the business like cleaning supplies.

Home Office

We cannot overlook the home office deduction. You have to conduct your business somewhere. Home rental requires a computer that must be set on a desk. You also need a chair to sit on while at your desk. Each of these items becomes a tax deduction if purchased for the business. Like the room rental above, you can deduct the square footage of your home office if that area is dedicated space for the office. My personal home office is half of the dining room. It contains shelves, filing cabinet, desk, chair and computer.  It is very easy to provide a picture proof of an office should the IRS request it during an audit. Items that are required for you to maintain your business such as internet, cell phone (phone and monthly plan) can become deductions too.

Talk to an Accountant

As I mentioned at the beginning of this article, I am neither an accountant nor tax professional. You should talk to an accountant to determine the deductions and amounts that are right for you. In addition, tax law changes frequently. What is allowed today as you read this article, may not be allowed but where when I wrote this piece.

 


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Topic: Income Taxes and Short Term Rentals
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TimA
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Interesting

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