What You Need to Know About Taxes and Deductions
No one likes the idea of paying taxes and if you are an exception to that statement you should probably just keep it to yourself.
The short term vacation rental business can be a profitable business but unfortunately, when we make a profit, our government wants to benefit from it too. As they say, death and taxes are the two things you can’t escape. I can’t help you with the death part but I can with the taxes. I’m not going to pay your taxes for you but I can help by giving you some advice on how to avoid problems with your taxes.
I will star by saying that there is not much that puts me in a worse mood than trying to figure out how much of my profit I owe to someone (insert tax man here) who did nothing to help create that profit! So, I hand this off to a professional. I do this for a couple of reasons…not just because of the mood altering affect of taxes. I also do it because I am not an accountant or CPA, I do not understand the ins and outs of taxes. I also choose to have a professional handle this for me so that I have someone to go back to in the event I have problems with the IRS and/or local government if my taxes are completed correctly.
- I don’t understand it;
- Someone to be responsible if it is done incorrectly;
- I don’t have time
Keep Detailed Records of Everything
You are running a business so treat it like one. Keep records of all rentals, the rates charged, expenses, etc… Remember that you are entitled to deduct all “ordinary and necessary” expenses necessary to operate your rental business. You can deduct new sheets, paint, dishes gifts for incoming guests and anything else that is an expense directly related to your rental business.
Keeping immaculate records will help you save time, which means money, if you are paying a professional and it also saves your time because you will have everything readily at your fingertips. You have a better chance of counting it toward a deduction if you have a record of it. You are running a business, you should be keeping these records anyway.
Fourteen Day Rule
Every short term rental owner needs to know the “14-day Rule.” You might also hear this rule referred to as the “Masters Exception.” That’s because it relates to the property owners how rent their homes out in Georgia only for the Masters golf tournament.
The Rule basically allows you to avoid paying tax on income you’ve earn from a short term rental IF:
- You rent the property for less than 14 days during the year AND
- You use the property for at least 14 days during the year
If you are just looking for a little non-taxable income during the year you need to know this rule. Many people, especially those who live in areas that have a special event each year, rent their property for just that specific event time frame. This way they can be sure to be under the 14 days and can make the income tax free.
It’s important to be aware that this Rule applies even if you are just renting out a room in your house. If you rent that room more than 14 days then you are required to pay taxes on that income. Also remember that if you are renting a room you can not deduct 100% of expenses such as your mortgage interest or property taxes; you have to apportion based on the size of the room compared to the size of the house.
Even if you follow this rule and stay under the 14 days if you are advertising and renting your property through a short term rental website like Airbnb or VRBO then they may report your income and you may get a letter from the IRS. No need to panic; you just need to let them know that the 14 day rule exception applies to you. Hence, another reason to keep great records.
Know About the State and Local Occupancy Taxes…or Hire Someone Who Does
Not only does the rate of different state and local government occupancy taxes vary, the names vary too. In some places it may be called a occupancy tax, others a hotel tax, transient lodging tax or short-term rental tax. What they call it is not really all that important. What is important is that you know it exists and you pay it.
These taxes are also handled differently by the different short term rental advertising websites. Some require you to collect the occupancy directly from the renters up front and others collect and submit the taxes in specific cities/states.
Again, this is an area where it is just better to have a professional handle it. I use my CPA and they do the research and figure out who and what needs to be paid. There are also companies, such as Avalara (https://mylodgetax.avalara.com) that do nothing but this and they do it at a pretty low monthly fee. These companies usually are able to determine which lodging tax you should be paying for your location, they register and file all the forms and business licenses that you may need, file your returns and tax payments, deal with notifications and correspondence from the tax agencies and generally make your life easier when it comes to being compliant with taxes. In my opinion it is best to let the professionals handle anything that has to do with tax liabilities.
Guest-Service Fee or Host-Service Fees Can Be Deducted
If you rent your property out for more than 14 days throughout the year, you should deduct 100% of the guest-service fee or host service fee from our reported rental income. These fees are directly related to your short term rental so you can deduct everything you paid for those fees.
You can also deduct the fee that these companies charge for putting your property on their website. Again, this is a business expense for your rental income business and should be deducted.
The bottom line is you need to treat your short term rental business, get this…as a business. In order to be successful and to keep your sanity you are going to keep immaculate records. If you know that you are not the type of person who maintains all the records, invoices, payments, etc…then hire someone to do it. If you don’t, not only are you going to miss out on tax advantages but you are likely to miss deadlines with taxing authorities which creates a whole new set of headaches and heartaches.
This is all general information. You need to confirm any tax decisions with a tax professional, which I am not. I am a short term rental property owner letting you know what has worked for me and what I think might work for you too. This is really important stuff be sure to talk to a professional in the area of accounting and taxes.
Let us know how you handle taxes and making sure you are getting all the benefits that you can…leave us a comment!