Tax Implications of Vacation Rentals

Investments in vacation rentals are becoming more popular with the rise of services such as Airbnb and VRBO. Many investors have successfully purchased and rented these properties all over the U.S. In our sharing economy, it is a wonderful way of earning top dollar. Short term rentals do have their own set of tax implications that the savvy real estate investor ought to be aware of. This post will focus on the tax treatment of the net income from short term rentals.

As an owner of a short term rental property, are you considered to be a landlord or a hotel owner? The answer to this question will have far reaching tax implications.

If you are considered a landlord, then the income will be considered rental income and the income and expenses will be reported on Schedule E of your individual tax return. As such, the income will not be subject to self-employment taxes. However, if you are considered a hotel owner, then the income and expenses will be reported on Schedule C of your individual tax return. As such, the income will be subject to self-employment taxes.

How do you know if you are a landlord or a hotel owner? The answer is that it depends on the average length of the rental period.

• If the average rental period is less than 7 days, then the IRS views it as an active trade or business, like a hotel. In that case, the net income will be reported on Schedule C and will be subject to self employment taxes.
• If the average rental period is between 7-30 days and you provide substantial services , then it is considered business income. If the average rental period is between 7-30 days and you do not provide substantial services, then you are considered a landlord, in which case the net income is reported on Schedule E and will not be subject to self employment taxes. Substantial services include hotel like services such as cleaning, meals, laundry, transportation, and other amenities.
• If the average rental period is more than 30 days, then you are considered a landlord, in which case the net income is reported on Schedule E and will not be subject to self employment taxes.

Whether the net income is considered rental or business income, there are some great tax planning opportunities for both categories. Make sure to contact your CPA to discuss the options available to you.