So, you’re renting out a room or your whole condo/house. Congrats! There’s a ton of money to be made. The average person with a vacation rental is making $20,000 per year. However, there are a few things you need to know to comply with the tax laws.
Mistake #1: Thinking that the service is withholding the taxes for you. You will be issued a 1099 at the end of the year and unlike a W2, nobody is sending in any taxes for you to cover your liability. You will most likely need to file a Schedule C, instead of Schedule E, and report your total income and your expenses by category. Once you’ve deducted the expenses from the income you’ll have your net income. That is the amount on which you’ll owe Federal and State taxes (this doesn’t include state sales/use tax – we’ll get to that later).
So, regarding your tax liability, you’ll be in a good place if you set aside a portion of your income to pay your Fed and State taxes. There are two easy ways to guestimate your tax rate. If you have last year’s tax return and your income and tax situation has stayed about the same then take amount on line 56 (the last line in the “tax and credits” section – in 2014 it was line 56, in 2013 it would have been line 55) and divide it by the amount on line 38. You’re putting the smaller number into the calculator and pressing the “divided by” sign and putting in the larger number. That will give you your effective tax rate. Let’s say you came up with 12%. Just multiply your total rental income by .012 and that will tell you how much you need to set aside so that you won’t run into problems on your Federal return. Throw an extra 3% on top of that and you’ll have close to what you need for most states.
If you don’t have access to a tax return you can use this chart to at least find out your tax bracket (not as useful as you effective tax rate, but it’s a start). It’s a fine estimate to use because you’ll probably end up setting aside a little more than you actually need, but that excess can cover the state and leave you in good stead.
Mistake #2: Not knowing that you have to pay your state/county/city lodging tax! Now that you are renting for less than 30 days at a time you are going to be taxed like a hotel. This tax has many names, but only one dark face. Oooh, that was spooky. But really, it’s called anything from transient tax to hotel accommodation tax to lodging tax, to TOT, or any combination of those words. It can range from about 4% to around 14%, depending on what city you’re in. Here is a cursory list by state.
You must pay this tax on your entire rental income. This bears repeating: You must pay this tax on your entire rental income, not just the profits after expenses (the way you pay on your Federal and State returns). This tax is a different monster. You pay it on all income and you will need to hold the same licenses that a hotel would in your city. A great service to take care of this for you is HotSpotTax. For about an average of $12 per month ($150 per year) they will remit all of your lodging taxes for you and let you know which business licenses and rental permits you need to have.
Mistake #3: Not keeping track of your expenses. The bulk of your expenses are easy to trace as they are documents you already store in your filing cabinet: your 1098 mortgage interest statement, property tax receipts, cancelled checks (on online record) from paying your rent, utility bills, etc. But there are other items you should also hold onto. Keep a record of the fees that Airbnb/Homeaway/a property manager or whatever service you use is charging you, cleaning and maintenance of the space, repairs and improvements to the rental space and to the whole place, whatever you purchased to make the environment nicer. Those 300 count sheets for your vacationer to use are definitely deductible!
Repairs and improvements you make to the space are handled differently on your federal tax return. Repairs specific to the space that is occupied by the visitor are deductible. Repairs to the unit in general are apportioned for the square footage that is rented, so those are partially deductible. Improvements (including new construction, new floors, carpeting, etc.) will be depreciated (deducted over time).
It is best to work with a professional tax preparer (preferably an Enrolled Agent) if you have a rental. Just make sure you are not being overcharged. Email or call us anytime for a price quote with no obligation. We work with people in every state and a number of foreign countries. All work is done by email, phone, or web conference so you never have the inconvenience of a live appointment.
Article written by Jenya Rose, EA, RTRP, IAR. Jenya owns Rose Tax & Financial and AirlineTaxes.com She and her employees work virtually with their clients, over email, phone, web conference, online meeting and secure portal to make the tax return process simple and convenient. She can be reached at (847)715-8930 or at firstname.lastname@example.org.