If you rent your home or another property to vacationers, whether you handle the details directly or use a popular third-party rental service, the income you receive is likely taxable. Fortunately, there are small business tax deductions, credits, and other tax planning strategies you can employ to make your taxable business income more manageable come tax time. We have compiled a list of 7 essential tax tips every vacation property owner should consider.
Got a legal question?
Get legal advice in minutes. Real Lawyers. Real Answers. Right Now.
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. That means keeping records of income received as well as keeping 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.
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, the major third-party listing and booking sites may not issue 1099 forms to property owners (subject to the companies’ internal rules). However, unless an exception applies, you are required to report your income to the IRS as well as 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 may include things like property management fees, insurance, mortgage interest, property taxes, occupancy taxes, credit card loan interest, leasing fees, host service fees, platform fees, and more. 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 and COVID-19 related 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 in 2025. Until then, though, 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 a business. In addition, vacation property owners may be entitled to take COVID-19 tax deductions.
Tip 6: Provide rental platforms with a completed W-9 form
Some rental host platform providers will automatically withhold and remit to the IRS as much as 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 use.
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. Any 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.
Seek guidance from your tax professional if you need help determining whether, and to what extent, your vacation property income is subject to taxes. If you have a legal question with regard to your taxes, contact a Rocket Lawyer On Call® attorney for fast and affordable advice.
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.