Some home rentals are tax-free federally, but don't overlook state and local levies
Monday, July 11, 2022
Online hospitality services have only grown in popularity since the first Airbnb rental in 2008. The private property rental service now has dozens of competitors worldwide.
In the United States, state and local tax officials quickly discovered the revenue they were losing when owners let their homes or rooms. Most of the major clearinghouses for private rentals have worked out agreements to collect and remit occupancy taxes, similar to Airbnb deals, in the United States and globally.
Of course, when taxes and real estate are involved, there always are bugs to resolve.
In Dallas, for example, the city council is yet again struggling with how to manage short-term rental properties throughout the city. Big D has no formal registration process for short-term rentals, although city data show hotel occupancy taxes are being proactively paid for 1,200 active short-term rentals.
Worldwide tax matters: Internationally, renters of private homes in Italy soon could find those accommodations costing more.
Airbnb filed a lawsuit to stop that country's 2017 tax that forces the collection of a flat-rate 21 percent rental tax on all short-term rentals. Last week, the European Court of Justice deemed the tax acceptable.
Advocate General Maciej Szpunar's nonbinding opinion found that the Italian law designed to crack down on tax dodging in the rental market is compatible with European Union law.
Federal tax-free rentals: Returning to the United States, if you lease your property through Airbnb or VRBO or a similar service, it should take care of state and local tax collection and remittance.
However, if you're a do-it-yourselfer who prefers to make arrangements with guest directly, check with your state and local officials about tax and other compliance issues.
Also take note of how often and for how long you make your residence available to paying guests.
When it's a very brief stay, you could make enough to easily cover any state and local taxes and still pocket a nice chunk of change that's free from federal taxation.
You don't have to report that rental money as income on your federal tax return as long as the time it was let was 14 or fewer days during the whole tax year.
Special events offer tax-free rental opportunities: Such short-term rentals are most common when there's a special event — presidential inauguration, big sporting event (Super Bowl, college basketball tournament) or music festival — in an area.
Many property owners in areas that draw big crowds for such one-off events like to avoid the chaos. Renting the primary residence that they're leaving for the duration and not owing tax on that money, which can be substantial, is icing on the cake.
Note, though, that you can't deduct any related expenses. You'll have to use some of the rental cash to pay the cleaning service to come in after your short-term renters leave.
15 or more days make a tax difference: Also make sure not to exceed the tax-free income time period. That could happen if you live in a place with multiple crowd-drawing events.
Here in Austin, Texas, for example, we have South by Southwest for 10 days, the Austin City Limits music festival for four days over two weekends, and the week-long Austin Film Festival. Homeowners who rent out their places for all events will go over the 14-day maximum for federal tax-free rental income.
When you do rent the home for 15 days or more, you must report the rental income on Schedule E (excerpt image below). But at least you then can deduct pro-rated expenses associated with the rented property.
Second home rental limits, too: There's also an option to rent a second home. Again, this other property — a lakeside cabin or beachfront condo or place on the ski slopes — that you personally visit just a few times year also can provide the same no-federal-tax income opportunity.
The limited, 14-days-or-less rental period applies to second homes, too. But if you personally use your vacation home during the year and also rent it out for more than the federal tax-free two-week period, things get a bit trickier.
You need to keep thorough records of your personal use time there, as well as of potentially deductible expenses related to the rental of the place. The documentation will help you allocate those costs for the shared personal and rental use.
You can read more on home rentals and taxes in my post Summer home rentals net some owners tax-free income.
The IRS also has online residential and vacation property information at Tax Topic 415, Renting Residential and Vacation Property; Publication 527, Residential Rental Property (Including Rental of Vacation Homes); and Tax Tip 2018-79, Plan ahead for vacation home rentals.
I also recommend that you get help from a tax professional who is experienced in the nuances of real estate taxation.
You also might find these items of interest:
- Dealing with a 1099-K for tax-free residential rental income
- Tax difference between home repairs & home improvements
- Home can be where the harbor is, along with the residential sale tax break
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