Legal rules apply to Airbnb renters
Find out if you must declare income from letting out your living space
Not so long ago, the only options for relatively inexpensive lodging were budget hotels or hostels. These were “go-to” options when attending an obligatory out-of-town event. An affordable hotel generally is just a place to crash for the night, and not usually the first choice for a relaxing vacation. But, with ever-higher hotel prices, steep resort fees and hidden charges, and the shrinking size of hotel rooms everywhere, budget options have become more and more attractive.
In today’s sharing economy, companies like Vacation Rentals by Owner (VRBO) and Airbnb are giving consumers more and better low-cost alternatives — and at the same time, providing new ways for homeowners to pull in some extra income. However, while this “C2C” economy is less formal than the traditional corporate world, the same legal and tax rules often apply. When renting out your home or property on websites like Airbnb, you could face unpleasant tax consequences if you’re not careful.
A closer look: Tax tips
- Keep very good track of the payments you receive – rents, security deposits, credit card payments, etc. Have a separate bank account when possible. Make sure you know exactly how much you received from your renters and never undercalculate this number.
- Maintain an accounting of your expenses with supporting documentation showing proof of payment (canceled checks, credit card receipts). Common expenses include: advertising; cleaning and maintenance; utilities; property insurance; property taxes; interest on a loan/mortgage; fees paid to collect rent; ordinary and necessary travel; repairs; depreciation; payments made to guests in the form of refunds; registration fees; and rental payments, e.g. rent paid to landlords by tenant hosts.
First things first
The first thing to keep in mind is that renting out a room in your house for even a short period of time usually is considered operating a business. It doesn’t matter if you own the home or if you feel that what you’re doing isn’t really a business; if you have customers and are collecting revenues, then generally you are in business. When you are in business, you have two separate concerns: legal and licensing requirements, and tax requirements. The difficulty is that these compliance requirements can occur at the state, county or city level, and simply identifying the type of license you need or which type of tax to pay can be daunting.
Here are some examples of what you need to consider when renting out property: zoning regulations; lodging house licenses; registration with inspection departments; and registration for sales and excise taxes. If you are unable to find the answers you need through your own research, talking with a legal or real estate professional is advised. Property owners should check with the state in which they live; good places to begin are departments such as the state’s division of licensure or department of revenue. Then contact the city where your property is located and learn about its requirements for lodging or rental properties.
As an operator of a short-term rental business, you typically are subject to two types of taxes: income taxes and excise or sales taxes. Most people are familiar with income taxes; rental income is like any other income and is subject to tax, in most cases (see below). The main thing to remember is that income taxes are calculated based on your net income, which is the income you receive minus the expenses you deduct.
A closer look: Tax tips (cont.)
- Calculate, track and pay your taxes.
- For federal and state income taxes, you may need to pay quarterly estimates.
- For sales or excise taxes, you may need to deposit as frequently as monthly.
- Hint: Have an accountant or an experienced tax preparer help you with this. Their fees are tax deductible!
- Receive your tax forms at year-end — but remember, even if you don’t receive them, you are still subject to income taxes. Airbnb does not issue year-end forms if the amount of rent you received is less than $20K. This does not excuse you from taxes – make sure you maintain your own records as described above.
- File your tax return by the due date.
Excise or sales taxes are different — they are calculated as a percentage of the rents you receive. These taxes must be collected at the time of transaction and paid over to the proper taxing authority on a monthly or quarterly basis. In many localities, these taxes can range from five to 15 percent. If you fail to collect these taxes from your customers, you will still be on the hook to pay them. This could have a huge impact on your bottom line!
An important tip: Not everyone who rents his or her house out is subject to the above requirements. For example, people who rent out their home for less than 15 days per year generally are exempt from reporting the income. However, you must maintain records of your rental activity regardless. In case someone asks, you want to have firm proof that you followed the rules.
Dmitry Dukhon, CPA, MST is a tax professional and business advisor who has operated his CPA firm in the Boston area since 2012. Dukhon advises individuals and small business owners on business management, financial analysis and tax compliance. He graduated summa cum laude from Bentley University and has several years of business environment experience. His firm, Dukhon Tax and Accounting LLC, provides technology-driven solutions to clients in the US and abroad and specializes in business advisory and international tax matters.
Svetlana Gankina, CPA, MST contributed to this article.