Whether you operate alone or through a rental agency, here are seven important tax recommendations that every vacation home owner should consider.
What you will discover:
If you rent out your house or another property to tourists, whether you manage the arrangements yourself or utilize a popular third-party rental agency, the money is certainly taxed. Fortunately, there are small company tax deductions, credits, and other tax planning options you may use to reduce your taxable business revenue. We have created a list of seven crucial tax recommendations that every vacation home owner should be aware of.
Table of Contents
Tip 1.Keep accurate, separate records of your income and spending.
It is tempting to dismiss your vacation rental revenue as a side hustle. However, unless you qualify for a limited rental use exemption (see Tip 7, below), your revenue is taxed, and you should consider it as business income. This includes keeping track of revenue received as well as receipts for costs spent. These may include marketing charges, fees paid to listing organizations, cleaning and maintenance costs for rental reasons, and any other costs associated with your property. Separating your rental income and costs from your own spending can make tax preparation simpler.
Some municipal tax authorities, like hotels, levy short-term lodging or occupancy taxes on vacation rental units. Investigate if your town collects occupancy taxes so you can guarantee you are up to date on your payments. whether you use a third-party booking site, check with them to see whether they collect and remit these taxes for you so you do not overpay your local tax authorities.
If your rental revenue is less than a specific amount, the main third-party listing and booking services may refuse to deliver 1099 forms to property owners (according to the firms’ internal restrictions). Unless an exemption exists, you must submit your income to the IRS as well as any state and local tax authorities when filing your income tax forms.
In general, you may deduct company costs, decreasing your total taxable income. Property management fees, insurance, mortgage interest, property taxes, occupancy taxes, credit card loan interest, leasing fees, host service fees, platform fees, and other costs may be included. You may still be able to deduct expenses if you rent a room in your house. However, when computing the amount for tax deduction purposes, some costs may need to be divided between business and personal usage depending on the number of days allotted to each use.
The Tax Cuts and Jobs Act of 2017 added new tax breaks for some eligible small company owners. These tax breaks will be phased off in 2025. However, you may be eligible for a pass-through company tax deduction of up to 20% of net rental revenue, deductions for major renovations to your rental property, and a bonus depreciation deduction for personal property used in a business until that time.
If a property owner fails to deliver a completed IRS Form W-9 to the provider, certain rental host platform providers will automatically deduct and pay to the IRS up to 28% of the property owner’s rental revenue. If you are required to complete and submit the form, doing so on time may assist guarantee that you are not unwittingly providing the tax authorities with a short-term loan in the form of overpayment of taxes during the year.
Finally, certain holiday rental property owners may be able to avoid paying income tax totally if their rental activity follows IRS guidelines controlling rental property that is being utilized for personal purposes by the property owner.
Without a doubt, the tax situation for small company owners is perplexing. Underreporting your company revenue or failing to meet all relevant tax duties may result in serious fines, so it is critical to thoroughly grasp the rules and prepare ahead of time to satisfy them.
