The risk of short-term rental tax evasion
- Aug 22, 2018 | Jennifer Sokolowsky
Renting out your property as a vacation rental can be a great way for hosts to make some extra money and meet new people. But that extra income is also of interest to the IRS and state tax authorities.
Many short-term rental hosts may not be aware that they need to report the income from their rental business and pay income taxes on it. And because short-term rentals can be a complicated tax area with some gray zones, it can be easy to make mistakes. This can get you in tax trouble. Here are some tips on avoiding that.
The 14-day rule
The 14-day rule means that if you offer a property for rent for 14 days or fewer in a single year, you don’t owe income tax on that rental income. So, if you operate a short-term rental very rarely, or do so for one event per year, for example, you don’t need to report that income or pay tax on it.
Tax reporting by Airbnb and other rental platforms
If you rent out your property for more than 14 days a year, you must report your short-term rental income, regardless of whether your short-term rental platform, such as Airbnb, HomeAway, or VRBO, reports your earnings to the IRS or sends you a summary of those earnings.
In fact, many online short-term rental platforms are actually classified as payment settlement entities and follow 1099-K rules set up for companies that process transactions for merchants. This means they’re not reequired to report earnings to the IRS unless the host has 200 or more transactions and makes more than $20,000 in a year. Unless you meet this threshold, you may not receive a tax statement from your rental platform — but that doesn’t relieve you of your tax reporting obligations.
You may also be required to pay self-employment tax on your short-term rental income, depending on factors such as the average length of guest stays, whether you provide extra services, and more. This is a tricky area of tax law and it’s best to get professional advice on your self-employment tax obligations.
Real estate professionals
The IRS may consider you a real estate professional if you make more than half of your income from real estate-related activities, including short-term rentals, and you spend more than 750 hours a year working on your rentals. Real estate professionals have their own tax reporting forms and processes.
Although you want to be sure to report your short-term rental income and pay the proper amount of income taxes due, you also don’t want to pay more than is needed. Short-term rental platforms will withhold federal taxes for you at a rate of 28 percent of your earnings unless you fill out a W-9 form, which allows you to reduce the amount of tax your platform withholds for you.
And then there are lodging taxes
Aside from income taxes, there’s another area of potential tax trouble that short-term rental hosts need to be aware of: lodging taxes. Income taxes and lodging taxes are very different, but one thing they have in common is that short-term rental operators are responsible for getting them right — and they could face penalties such as fines, interest, and even legal action for failing to fulfill their obligations.
In fact, state and local governments are becoming more aware of the potential untapped tax revenue represented by short-term rentals. While many short-term rentals have been flying under the radar of local authorities for years, governments are increasingly finding ways of keeping track of short-term rental hosts in order to enforce operation regulations and tax laws.
Potential lodging tax pitfalls
While income taxes are paid by short-term rental hosts to federal and some state governments as a percentage of their income, short-term rental lodging taxes are actually paid by guests as a percentage of the cost of their stay. Hosts are required to collect lodging taxes from guests and pass them on to the correct tax authority.
Unlike income taxes, lodging taxes are not levied by the federal government, but can be required at the state, county, city, or other local level. Most often, the total lodging tax charged to guests is made up of many different taxes from various jurisdictions. These can be sales taxes and/or lodging taxes, which can also be known as hotel tax, transient occupancy tax, bed tax, tourist tax, and more.
Lodging tax registration
While lodging taxes are collected all together in one lump sum when guests pays their bill, they’re often remitted to different jurisdictions. That means hosts must often register and file short-term rental taxes with a variety of tax authorities. Registration can be accomplished on the tax jurisdiction’s website, and may require a fee.
In order to collect the right amount of lodging tax from your guests, you need to make sure you have the right rate, remembering that the total rate may be a combination of taxes from several different jurisdictions. Keep in mind that these rates can and do change, so it’s important to have the latest rate. Tax authorities should post the correct rates. You can also use this lodging tax lookup tool to get the correct tax rates for your exact location.
Before you collect lodging tax from your guests, you also need to be aware of whether any tax is being collected for you by your short-term rental platform. Both Airbnb and HomeAway collect some taxes in some locations, but don’t assume that your platform is collecting all lodging taxes for you.
You’ll be required to file and pay lodging tax returns according to due dates set by the tax authority. These could be monthly, quarterly, or even annually. You’re expected to pay all taxes due by the deadline.
Keep in mind that if you’re filing in more than one jurisdiction, the due dates may not be the same. And in most jurisdictions, you’re still required to file a lodging tax return even if you had no rental income within the period.
Failing to register with local tax authorities correctly, collect the correct amount of tax from guests, or file and pay lodging taxes on time can all result in compliance penalties including fines, interest, and legal action. The MyLodgeTax service can help short-term rental hosts manage their lodging tax obligations to make sure they are getting taxes right.
Keeping up with taxes
The long and the short of it is that running a short-term rental often triggers tax obligations, whether you rent out a spare bedroom or manage several short-term rentals. It’s up to you to be aware of your obligations for both income taxes and lodging taxes. Failing to take care of either type of tax property can get you into hot water with tax authorities.