Vacation rental taxes for the Fourth of July can be a tax-free windfall

July 03, 2018 : Annelise Wiens

During the Fourth of July, visitors will flock to vacation retreats to enjoy the parades, barbeques and fireworks – and will need a place to stay. If demand is high enough and supply is low enough, hosts through Airbnb, Homeaway or VRBO hope for a windfall. In some cases, their windfall could be tax-free, whether it’s $500 or $50,000. That’s because there is no tax impact for renting out a residence for 14 days or fewer in the same year. So if someone wants to list their house for only the Fourth of July, all that income will be tax free (unless substantial services are provided): no income tax, no self-employment tax.

The rules are more complicated for longer rentals. Homeowners could be taxed on their rental income either as a landlord (Schedule E) or self-employed (Schedule C).

Owning a rental property v. owning a business comes down to “substantial services”

Taxpayers who rent out their home, or just a room in their home, are usually rental property owners – not small business owners. Just because it’s a series of short-term rentals obtained through a “sharing” platform does not mean it is taxed much differently from other more traditional rental properties.

If rental property owners provide “substantial services” to their guests, they will file as though self-employed. Substantial services are concierge or hotel-like services like guides and tours, meals and entertainment, transportation or cleaning the rented space while it is occupied.

Rental property taxes mean no self-employment tax

Most rentals will be taxed as a rental property instead of a business because most hosts do not provide “substantial services.” The advantage of being taxed as a rental property is that the host does not have to pay self-employment tax of 15.3 percent that covers contributions to Social Security and Medicare.

Expenses to deduct for a rental property, whether a business or not

Whether or not they’re providing services in addition to renting their property, rental property hosts can deduct some expenses to run the rental property. If they don’t live in the home during the year, they can deduct all the expenses related to the property like mortgage, utilities, repair costs, advertising, cleaning and more.

If they live in the home at least 15 days of the year, they may not be able to deduct all their expenses. They can deduct only the percentage that relates to the rental share of the expenses. For example, if a host rents a space that makes up 25 percent of the square footage of their home for half the year, the host can deduct (0.25 x 0.50) or 12.5 percent of their annual expenses.

Pay enough taxes throughout the year to avoid underpayment penalties and interest

The U.S. tax system is a “pay-as-you-go” system, which means taxpayers face underpayment penalties and interest if they don’t make installment payments throughout the year. Commonly, taxpayers have a little tax withheld from their paychecks to cover this responsibility, but unlike income received from an employer, no taxes are automatically withheld from the income earned from a rental property.

If hosts wait until April to pay their tax bill, they could end up incurring an estimated tax penalty for underpayment. To avoid this penalty, they must pay 90 percent of the tax they owe for the current year or 100 percent of the tax owed for the previous tax year.

They can pay what they owe by making estimated tax payments four times a year: in April, June, September and January. If they have a traditional job as well, or a spouse with a traditional job, they could instead adjust the withholding with their employer to cover the taxes they will owe from their rental property.

Look out for different tax forms and know what they report

By the end of January each year, taxpayers may receive a Form 1099 which can report income paid to them or more commonly for hosts, the amount of payments processed by the platform to the host. They’ll generally need to report all this income on Schedule C or Schedule E of their federal income tax return, but it’s important to include all deductible expenses on the return. The IRS also receives a copy of any Forms 1099 taxpayers receive and will match that information against the tax return to make sure the taxpayer reports all their income.

It’s a common misconception that if a taxpayer does not receive a Form 1099, or if the income from the side job is less than $600, that income isn’t taxable. This isn’t true. All income earned through a rental property, unless it is for 14 days or fewer, is fully taxable and must be reported on Form 1040, Schedule C or Schedule E. If they also provide “substantial services” to their guests, they’ll also need to prepare Form 1040, Schedule SE, for self-employment taxes.

For more information, hosts should check out the Airbnb Host Reporting Guide from The Tax Institute.

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Annelise Wiens

Former Editor and Producer

As the former newsroom editor, Annelise Wiens was interested in more than just tax and industry news, but the stories of H&R Block's 80,000 associates, their communities and H&R Block's world headquarters in Kansas City, Mo. Wiens joined H&R Block in 2014 from a public relations agency, where she worked with clients in the financial services industry. Before that, she worked as a communicator for a senior member of the United States House of Representatives. She graduated from Biola University in La Mirada, CA with a bachelor's degree in history.

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