The vacation rental industry has been booming for some time now, with no signs of slowing down. In fact, it’s how some people get into real estate: by realizing the income from renting a room in one’s home is pretty nice. More investors and ordinary folks are taking advantage of platforms such as Airbnb to maximize their real estate income. If you’re one of them (or thinking about becoming a host), you should be aware of your tax obligations. Here’s the quick and dirty guide for the vacation rental investor.
One simple way to avoid extra tax expenses is to limit vacation renters to a two week stay annually. The Tax Code only kicks in the costs discussed below for visits over this time period. So if you, say, are an occasional user of Airbnb or tend to only have very rare short guests, you won’t need to report the income. But here’s the catch: you can’t deduct your business expenses on unreported income.
If you meet the following conditions, you must report and pay taxes for your vacation rental business:
If you live in the home you’re renting, that means you will have to distinguish which portion of the mortgage is related to personal vs. business use. Property taxes and interest will also be recorded on Schedule E of your tax return.
Airbnb might send you a 1099-K, the type of 1099 for third party transactions. If Airbnb withholds funds for any reason, you’ll also receive notifications of withholdings at your mailing address.
Not everyone gets a 1099-K from AIrbnb. However, if you earn over $20,000 or make over 200 reservations in a single tax year, you will receive one. Airbnb will also report your earnings.
Everything discussed above pertains to federal law. But Airbnb investors must also conform to state and local regulations. Airbnb and vacation rental regulations change fairly rapidly and vary dramatically from jurisdiction to jurisdiction.
The best thing an investor can do to ensure they are complying with all state and local laws is to acontact a qualified real estate attorney. A small fee for a bit of legal advice that could keep you away from a tax dispute is totally worth it.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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