A Comprehensive Tax Guide For Short-Term Rentals

Editorial team of TFX

• 10.12.21 • 5 min read

Are you planning to generate additional rental income by renting out your primary residence or vacation home via Airbnb, HomeAway, or Vrbo? Then this tax guide for short-term rentals will help you understand its tax implications.

In this guide, you will learn the difference between short-term rental and regular rental property, the short-term rental tax rules related to the rental periods, allowable tax write-offs, and the relevant forms. 

How do short-term rentals differ from regular rental property?

If you are planning on renting out your space for short-term rentals you might want to weigh the costs and benefits of doing so. Your regular rental property is taxed as rental real estate income tax. 

It is important to understand how taxes on short-term rentals differ from regular rental property. 

There are two major factors you need to consider:

The Earnings

The earnings from short-term term rentals are greater than the monthly rental income you earn from renting out your property on a yearly lease. This means you will have to figure out how to shelter the excess income from taxes.

Substantial Services

The IRS may consider short-term rentals as an active business if you offer substantial services to the guest staying at your vacation home. Substantial services may include housekeeping, linen services, regular cleaning, etc.

If your short-term rentals are classified as an active business then you might have to pay self-employment taxes.

Your net profits will be taxed at 15.3%. Out of which, 12.4% is related to social security and 2.9% is for medicare. When a person is employed the self-employed tax is divided between the employer and the employee. Employees pay half i.e. 7.5% and the remaining half is paid by the employer.

What are the short-term rental tax rules for renting for less than 7 days, for 14 days, and over 15 days?

There is a 14-day rule which determines whether or not your rental property is considered a dwelling unit. This rule is also known as “Master Exception.” 

According to this rule if you occupy your dwelling unit for more than the greater of 14 days or you stayed at the property for at least 10% of the total days the property was rented out then your rental property is considered a dwelling unit. 

It is important to note that the rent you charge should be fair. In other words, the amount charged as rent is reasonably expected to receive from potential guests who are willing to pay if they decide to rent a similar unit. 

You might have more than one dwelling unit during a tax year. Your primary home and your vacation home. If your vacation home is occupied by a tenant for more than 300 days during a year at a rental amount that reflects its true worth then that it will be taxed as rental real estate income tax. 

It is important to note that you are also responsible to collect lodging taxes and remit them to the IRS. No deductions are allowed on these taxes.

The tax implications will vary depending on the length of time you rented out your property and to what extent you participated in the day-to-day management of the activity.  Moving on in this tax guide for short-term rentals we are now going to look at how the time periods of renting affect the tax treatment 

7 Days: 

Under the passive activity rule, the IRS does not consider your activity a rental activity if the average rental period is 7 days or less per guest. You still have to report the activity to the tax authority

If losses are incurred from passive activities you will not be able to deduct them in the current year. However, you can carry it forward to the future year. According to the IRS

“Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. You can carry forward disallowed passive losses to the next taxable year. A similar rule applies to credits from passive activities.”

14 Days or Less:

If your dwelling unit is rented out for 14 days or less during a tax year, you are not liable to pay any taxes. Since your earnings are not taxable you will not be eligible to get any tax deductions.  

15 Days or More:

If you have hosted guests for more than 15 days you will have to report your income. In this case, your allowable deductions will be to the extent of your income. You can carry forward unused expenses to offset future income from similar activities.  

What are the allowable tax write-offs for short-term rental tax?

As a general rule, the IRS allows you to deduct business expenses that are ordinary and necessary in carrying out your business. 

To what extent you can claim allowable tax write-off will depend on whether you have rented out your entire property or a portion of it.

When you rent out your entire property you are allowed to deduct directly attributable expenses in full to arrive at your taxable income. When you rent out a room or a portion of your property you have to apportion some of the expenses. 

Following are the allowable tax write-offs that you can use to reduce your taxes as a landlord.

• Guest service fees
• Property insurance and private mortgage insurance 
• Mortgage interest
• Cleaning services
• Meals
• Maintenance 
• Utilities
• Credit card interest

What are short-term rental tax laws related to rental property improvement vs repairs?

In an event where you have spent money on improving your rental unit, you have to decide whether to classify it as capital expenditure i.e. deduct the expenses over years, or current expense i.e. deducts the entire expense in a single year.

The internal revenue code states that:

“Section 263(a) of the IRC requires you to capitalize the costs of acquiring, producing, and improving the tangible property, regardless of the size or the cost incurred. The tax law has long required you to determine whether expenditures related to tangible property are currently deductible business expenses or non-deductible capital expenditures.”

Which tax forms are relevant to report short-term rentals?

There are two schedules C and E which are usually used to report short-term rentals. These schedules are a part of form 1040. Which schedule is relevant in your case will depend on a few factors.

Schedule C:

If your short-term rental activity is classified as an active business because you provide substantial services along with the accommodation, then you should use Schedule C to report your rental income. This schedule is used by individuals who are self-employed.

IRS uses the information you provide them in schedule C to compute your taxable profit and to assess whether you owe them taxes or are eligible to claim a refund. 

Schedule E:

If you are earning short-term rentals with minimum involvement and do not offer substantial services along with the accommodation then you might have to use Schedule E. 

In recent years, the platforms like Airbnb, Homeaway, and Vrbo have provided individuals with an opportunity to generate supplemental income. After reading this tax guide for short-term rentals you may be feeling that the rules are complex. You can always work with a tax professional. They will not only figure out exactly how much you owe to the tax authority but will also tell you about the legitimate ways to reduce your tax liability.