Tip 1: Keep detailed, separate records of income and expenses
It may be easy to think of your vacation rental income as casual extra income. However, unless you qualify for an exception based on limited rental usage (see Tip 7 below), your income is taxable, so you should treat it as business income. This means keeping records of income received and receipts for expenses incurred. These may include expenses related to marketing the property, fees paid to listing organizations, costs related to cleaning and maintenance for rental purposes, and any other costs related to your property. Keeping your rental income and expenses separate from your personal expenses will make tax time easier. Use this easy Profit and Loss Form to track income and expenses.
Tip 2: Understand occupancy taxes
Some local tax authorities impose short-term lodging or occupancy taxes on vacation rental properties, just as they do on hotels. Investigate whether your municipality assesses occupancy taxes so you can ensure you are meeting your obligation to pay these. If you use a third-party booking site, check with them to determine whether they are collecting and remitting these taxes for you, so you do not end up overpaying your local tax authority.
Tip 3: Report income as required – even absent a 1099 form
If your rental income is below a certain threshold, major third-party listing and booking sites may not issue a 1099 form to you (subject to the companies’ internal rules). However, unless an exception applies, you are required to report your income to the IRS, as well as to any state and local tax authorities, when preparing your income tax returns.
Tip 4: Take available tax deductions
You can generally deduct business-related expenses, lowering your overall taxable income. These expenses may include the following:
- Property management fees.
- Insurance.
- Mortgage interest.
- Property and occupancy taxes.
- Credit card loan interest.
- Leasing, host service, and platform fees.
If you rent a room in your home, you may still be able to take deductions. However, certain expenses may need to be apportioned between business and personal use based on the number of days allocated to each use when calculating the amount for tax deduction purposes.
Tip 5: Use limited Tax Cuts and Jobs Act tax deductions
The Tax Cuts and Jobs Act of 2017 included additional tax deductions for certain qualified small business owners. These tax benefits are set to expire at the end of 2025. Until then, you may be entitled to a pass-through business tax deduction of up to 20% of net rental income, deductions for significant improvements to your rental property, and a bonus depreciation deduction for personal property used in your business.
Tip 6: Provide rental platforms with a completed W-9 form
Some rental host platform providers will automatically withhold and remit to the IRS up to 28% of a property owner’s rental income if the property owner does not return a completed IRS Form W-9 to the provider. If you are asked to complete and return the form, doing so in a timely manner can help ensure you are not inadvertently giving the tax authorities a short-term loan in the form of overpayment of taxes throughout the year.
Tip 7: Determine whether your rental activity complies with the 14-day rule
Finally, some vacation rental property owners may actually be able to avoid paying income tax entirely if their rental activity complies with IRS rules governing rental property that is also used by the property owner for personal purposes.
As outlined in IRS Topic No. 415, property owners do not need to report or pay tax on rental income if they rent their property (or even a room in a home) for 14 days or fewer during the tax year and also use the property themselves for 14 days or more, or for at least 10% of the total days it is rented to others at a fair rental price. Property owners who rent their vacation homes for 15 or more days during the year must pay taxes on the income received.
Seek guidance when needed to understand and comply with tax obligations
There is no question that the tax landscape for small business owners is confusing. The penalties for underreporting your business income or failing to meet all applicable tax obligations can be severe, so it is important to fully understand the requirements and plan ahead to meet them.
If you need tax help, you can reach out to a Tax Pro who will understand your particular tax situation and prepare and file your taxes for you. If you have a legal question regarding your taxes, contact a Rocket Legal Pro for fast and affordable advice. Finally, if you're in need of a Vacation Rental Agreement, this customizable version is a great way to document your arrangement with a renter and use e-signatures to make the process fast and easy.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
