Airbnb. VRBO. FlipKey. These and other short-term vacation rental sites — part of the new sharing economy — have become the next big thing for vacationers. Now I know why.
It became all too real to me after a recent vacation in Nice. I stayed in a nice hotel room and, frankly, had a wonderful time. Then I saw a picture of a friend who had visited Nice around the same time. She stood on a balcony overlooking the French Alps, wine glass in hand. Think I wasn’t jealous? It turns out she stayed in a gorgeous home with an up-close view of the Alps, and paid considerably less than I did for it.
What to Know About Sharing Your Home
You’ve likely heard stories or seen ads about the advantages of booking your vacation through a short-term rental site. But it’s less likely that you’ve heard about the flip side — the consequences of sharing your home with vacationers. Sounds like you can make good money, but what else do you need to know?
Another Airbnb story about another friend, this time a young professional who bought a home in the wicked-hot Seattle real estate market. He converted the basement into a studio that he lived in while renovating the upstairs. He now rents that same studio as a short-term vacation rental and makes enough each month to pay his mortgage.
Sounds good, but you know it can’t all be good.
First, there’s always the accounting. It’s essential that you keep detailed records of your rental dates, income and associated expenditures.
Now let’s talk taxes.
Federal Tax Rules for Short-Term Rentals
The rental income I get, do I have to pay tax on it?
The short answer is probably.
As a general rule, the Internal Revenue Code states that gross income means all income from whatever source derived. Unless there are specific exceptions, your income will be taxable for federal income tax purposes.
One possible exception that might apply is the 14-day rule. Under this rule, rental income is not taxable if the property is rented for no more than 14 days during the year.
The 14-day rule applies whether you’re renting the entire home or just a room.
Other Rental-Related Income
In addition to rent, you may receive taxable income for providing any goods or services, such as meals or cleaning services. And if you charge a cancellation fee, that is income.
What expenses can you deduct from your income? Generally, everything that relates to the rental. This includes everything from a new coat of paint to vanity items in the bathroom and the bottle of wine you leave for your guests to enjoy upon arrival. You can also deduct the host-service or guest-service fee that the rental site charges you as that fee is directly related to your rental.
If you rent out a room or a basement rather than the entire house, you may deduct a share of your mortgage interest and property taxes. You can’t deduct 100 percent, but you can prorate the expense, for example by the square footage.
One caveat: Depending upon the level of personal use, your deductions may be limited.
Short term rental sites like Airbnb are required to withhold a full 28 percent of your rental income, unless you provide them with a W-9 form. The W-9 form identifies you by name and Social Security number, which enables the IRS to trace your rental income to your tax return — ensuring that you actually pay tax on the income.
At the end of the year, the rental site will provide you with a Form 1099, indicating the full amount of income you received from them during the year. They also send a copy of the form to the IRS, so don’t forget the income on your personal tax return.
State and Local Occupancy Taxes
About half of the states in the U.S. levy a transient occupancy tax on those who regularly engage in short-term rentals. Some call it an occupancy tax or lodging tax. Generally, it applies to rentals of 30 days or less.
Even states that do not impose a statewide occupancy tax typically allow cities and counties to impose their own taxes—for example California.
An occupancy tax may not be the first tax that comes to mind for short-term rentals, but it is often the highest tax that applies. Add up the applicable state, city and county tax rates and it is not uncommon to see occupancy rates as high as 10 percent, 15 percent or even 17 percent. The current rate in Seattle Washington is up to 9.6 percent.
Washington State B&O Taxes
In Washington, it is presumed that you are engaged in a taxable business activity if you rent out your home three or more times a year, for 30 days or less. If that describes your situation, you must register with the Washington State Department of Revenue and collect and remit retail sales tax and lodging taxes for the rentals.
The retail sales tax applies to the amount you charge for the stay. In addition, you might be liable for taxes on no charge fees, deposit forfeitures, early and late departure fees, to name a few. Some of these are subject to retail sales tax, others only to B&O taxes for service and other.
In addition to the state B&O tax, some Washington cities also impose a B&O/public utility tax. Your short-term vacation rental may also be subject to these city taxes.
The federal and state rules for short-term rentals can be complex,