So, you’ve turned your spare room or vacation home into a cash-flowing machine with Airbnb or Vrbo. Good job! Now, with that income flowing in, it’s time to explore smart strategies to help you keep more of what you earn.
The key is to treat tax planning not as a chore, but as a treasure hunt for deductions. And this guide is your map! We’ll show you exactly where to look to report your income correctly and uncover all the expenses you can claim. We’ll also explore rules like the famous 14-Day Rule that might just make your short-term rental income tax-free.
IRS Rules: What Counts as a Short-Term Rental?
Let’s start by looking at how the IRS categorizes short-term rentals, since their definition is the foundation for your tax reporting. If your guests stay for 30 days or less on average and you provide services such as cleaning or meals, the IRS may classify your property as a short-term rental. It’s a bit like running a hotel or a bed-and-breakfast.
This is different from a long-term rental, where a tenant signs a traditional lease for several months or years. The distinction is essential because it can affect whether your income is subject to self-employment taxes in addition to income tax.
The “14-Day Rule” or “Augusta Rule” Explained
Here’s a fun rule that every host should know. If you rent out your property for 14 days or less during the entire year and you use the property for personal purposes for more than 14 days (or more than 10% of the total days it was rented out), you may not have to report any of that rental income. It’s a fantastic perk for casual hosts.
For example, if you rent your beach house for two weeks during the summer and use it yourself for three weeks, that rental income is likely tax-free! However, once you hit 15 or more rental days, you’ll need to report all the income you’ve earned from it.
Reporting Your Rental Income: What to Include
Once you’ve confirmed you need to report your short-term rental income, the next step is to gather all the necessary information. Your gross rental income is more than just the nightly rate your guests pay; it’s the total of everything you’ve collected from them.
Make sure your accounting includes:
- Nightly, weekly, or monthly rent payments
- Cleaning fees you charge to guests
- Any pet fees or other add-on charges
- Fees collected from guests to cover maintenance or utility expenses
You can typically find a summary of your gross income on your Airbnb or Vrbo host dashboard. If you receive payments through a third-party processor like PayPal (which is what Airbnb and Vrbo use), you’ll likely get a Form 1099-K at the end of the year. This form shows the total gross income you received through the platform. Remember, this is the total before any expenses or platform fees are taken out.
Unlocking Deductions: How to Lower Your Taxable Income
Now for the part that every host loves: deductions. Keeping meticulous records of your expenses is how you reduce your tax bill and increase your profit. Think of every relevant expense as a clue on your deduction treasure map.
Your expenses will fall into two categories: direct and indirect. Direct expenses are costs that are 100% for your rental guests, such as the coffee you provide or the cost of guest-specific toiletries. Indirect expenses are costs for maintaining the entire property, such as mortgage interest or utilities. For indirect expenses, you can only deduct the portion that applies to the rental activity.
Here are some of the most common deductions you can claim:
- Mortgage interest and property taxes: If you rent out your home, you can deduct the percentage of your mortgage interest and property taxes that matches your rental use.
- Insurance: The premiums for your homeowner’s or landlord insurance are deductible.
- Repairs and maintenance: Fixing a leaky faucet, patching a wall, or repairing a broken appliance are all deductible repairs. Be aware that larger projects considered “improvements” (e.g., a full kitchen remodel) are handled differently; they are depreciated over several years rather than deducted all at once.
- Utilities: The rental portion of your electricity, gas, water, and internet bills can be deducted.
- Supplies: Items you provide for your guests — including toilet paper, soap, shampoo, paper towels, coffee, and snacks — are 100% deductible.
- Cleaning and management fees: Fees paid to cleaning services or property management companies are fully deductible.
- Platform fees: The commission or service fees that Airbnb, Vrbo, or other platforms charge count as a business expense.
- Professional services: Did you consult with a knowledgeable CPA or a lawyer about your rental business? Their fees are deductible.
- Depreciation: This valuable deduction lets you recover the cost of your property and furnishings over time. It’s a bit more complex to calculate, so it’s a good idea to consult a tax professional for help.
Common Mistakes and Pitfalls
- Avoid Underreporting of Income – Compare your 1099 Tax documents to your net bank deposits. The difference is the platform (AirBnB, VRBO etc.) fees, locality taxes, sales tax, and/or other fees. If you simply report your net deposits on your tax return, you may trigger and IRS penalty for underreporting of income or worse a full-blown audit.
- Collect and Remit Local Taxes – In some cases, aside from federal and State Income taxes, and Sales and Use Tax, there are certain localities that incur a form of Tourist Tax or Withholding Tax (e.g. Osceola County FL Tourist Development Tax, Austin Texas City Lodging Tax, Warren County NC Occupancy Tax etc. ). As the property owner, you are ultimately responsible for such taxes regardless of whether you are using a property management company. You need to be vigilant that such taxes are being collected, are either being paid on your behalf, confirming such payments are actually coming out of the bank account and paid directly to the locality, or you as the host are making these payments. Many online platforms collect and remit Sales and Use tax for the majority of the states on behalf of the hosts; however, missing any local taxes could result in penalties and interest.
- Identify Rental Income from Self-Employement Income – As stated above, rental income is reported on Schedule E and is not subject to self-employment income. In certain situations, offering substantial services could make your rental activity count as a business. If so, you would use Schedule C (Form 1040), Profit or Loss from Business, instead. Earnings reported on Schedule C are generally considered self-employment income and taxed accordingly.
Depending on your personal circumstances, there can be other nuanced areas. So if you think any of the points might apply to you, consulting with a tax professional is a wise move.
Putting It All Together: Where to Report on Your Tax Return
After you have your income and expenses tallied, you’ll report them to the IRS on Schedule E (Form 1040), Supplemental Income and Loss. This form is where you list your total rental income, categorize and subtract all your deductible expenses, and calculate your final net profit or loss for the year.
Let’s Make Tax Time Less Taxing
Navigating the world of short-term rental taxes involves a few vital and, at times, complex steps. If you want a partner to help you double-check your map and make sure you’ve found every last piece of treasure, Prithi Daswani, CPA, is here to help!
Contact our team today. We’ll help you build a smart plan for your short-term rental business — one that keeps you compliant and maximizes your earnings. Let’s get started!
[1] https://osceolataxcollector.org/tourist-development-taxtes/
[2] https://www.austintexas.gov/page/hotel-and-rental-tax#
[3] https://www.warrencountync.com/faq.aspx?TID=31&utm