If you've been considering listing your house, apartment, or condo on one of the popular vacation rental websites, you're not alone. The increase in popularity amongst consumers utilizing these short-term rentals poses an attractive incentive to many individuals. If you're considering renting out your residence, there are some financial tax aspects you will need to keep in mind.
Are short-term rentals taxed differently?
First, short-term rentals are taxed differently than usual rental property found on an individual's Schedule E on the tax return. Rentals with a main occupancy duration of short term are usually subject to self-employment taxes and reportable on Schedule C of an individual's tax return. Self-employment taxes will add an additional 15.3% of tax to income, which is above the individual’s marginal tax rate. If utilizing a service to list the rental in the sharing economy, the listing company will usually provide the owner with a 1099-MISC showing gross rents received through their service for the calendar year.
Can I claim deductions?
Taxpayers may claim deductions to offset the rental income on their Schedule C. If the owner of the residence utilizes the property as a dwelling unit during the year, then special limitations on deductions are enumerated in the Internal Revenue Code Section 280A. Property will be deemed a dwelling unit if the taxpayer personally uses the property for the greater of: 14 days or 10% of the days in a year for which a unit is rented at fair value. Exception to the dwelling unit limitations will apply if two tests are met:1. The property is regularly available for occupancy by paying customers.2. No person having an interest in the property uses the business portion as a residence during the year.So, if a portion of a property is segregated exclusively for rental use throughout the year, the Section 280A limitations on expenses directly associated with the property will not apply. If a property is considered a dwelling unit the limitations imposed by Section 280A apply. Therefore, deductions cannot exceed the net income generated from the unit, and the expenses attributable to rental must be in proportion to the number of days the unit is rented. Any excess deductions will be suspended and carried forward to the next year.
What other tax considerations are there?
Another item a taxpayer should note is that depreciation taken on the rental unit will be recaptured as ordinary income should the property later be sold at a gain. The normal personal residence, 2-year gain exclusion will not apply to the recaptured depreciation. Further, there are often local sales and occupancy taxes assessed on short-term rentals. Owners utilizing a third-party service should closely review their agreements to determine if the third party is responsible for collecting and remitting these taxes on booking, or if that responsibility falls to the owner.
What if I just rent my property for a few weeks a year?
One silver lining for taxpayers who rent their property less than 15 days in a taxable year is that the activity does not have to be reported federally. Neither income nor expenses associated with the rental activity would be included on the federal income tax return.For further information on the tax consequences of short-term rentals, please consult your tax advisor.