Understanding the Tax Implications of Short-Term Rentals
Short-term rentals (STRs) have become increasingly popular in recent years, as more and more people look for alternative ways to earn income from their properties. However, it’s important to be aware of the tax implications of owning and operating an STR before you get started.
What are the different types of STRs?
There are two main types of STRs:
- Entire home rentals: This is when you rent out your entire property to guests for a short period of time, typically less than 30 days.
- Room rentals: This is when you rent out a single room in your home to guests for a short period of time.
It’s important to know which type of STR you’re operating, as the tax implications will vary depending on the type of rental.
What are the tax implications of owning and operating an STR?
The tax implications of owning and operating an STR can be complex, and it’s important to speak to a tax professional to get specific advice for your situation. However, some of the general tax implications to be aware of include:
- Income tax: You will need to pay income tax on the rental income you earn from your STR. The amount of income tax you owe will depend on your overall income and filing status.
- Self-employment taxes: If you earn more than $400 in rental income from your STR, you will need to pay self-employment taxes. Self-employment taxes are a combination of Social Security and Medicare taxes, and they are typically higher than regular income tax.
- Property taxes: You will also need to pay property taxes on your STR. The amount of property tax you owe will depend on the value of your property and the local property tax rate.
- Occupancy taxes: Some cities and counties impose occupancy taxes on STRs. These taxes are typically a percentage of the rental income you earn.
- Other taxes: There may be other taxes that you need to pay, depending on your specific situation. For example, if you use a property management company to manage your STR, you may have to pay a management fee.
It’s important to be aware of all the tax implications of owning and operating an STR before you get started. By doing your research and speaking to a tax professional, you can avoid any surprises and ensure that you’re paying the correct amount of taxes.
How can I reduce my taxes on my STR?
There are a few things you can do to reduce your taxes on your STR, including:
- Deducting your expenses: You can deduct all of the expenses you incur in connection with your STR, including mortgage interest, property taxes, repairs and maintenance, utilities, and advertising.
- Using the home office deduction: If you use a portion of your home for your STR business, you may be able to deduct a portion of your mortgage interest, property taxes, and other expenses as a home office deduction.
- Taking advantage of depreciation: You can depreciate the cost of your STR over time, which can help you reduce your taxes.
- Claiming the earned income tax credit: If you qualify, you may be able to claim the earned income tax credit, which can reduce your taxes by up to $6,728.
By taking advantage of these tax deductions and credits, you can reduce your taxes on your STR and keep more money in your pocket.
Conclusion
Owning and operating an STR can be a great way to earn extra income, but it’s important to be aware of the tax implications before you get started. By doing your research and speaking to a tax professional, you can avoid any surprises and ensure that you’re paying the correct amount of taxes.
Here are some additional resources that you may find helpful: