While these are new methods that making renting your home easy, there is some tax implications that you need to be aware of in order to increase your net profit.
What is a dwelling unit? Dwelling unit includes a house, apartment, condominium, mobile home, vacation home, or similar property that has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. However, it doesn’t include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment.
For Example: You rent a room in your home that is always available for short-term occupancy by paying customers. You don’t use the room yourself and you allow only paying customers to use the room. This room is used solely as a hotel, motel, inn, or similar establishment and isn’t a dwelling unit.
If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Only your rental expenses may be tax deductible. If your dwelling unit used as a home and rented 15 days or more, and you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited.
Income Taxes: As a short-term rental host, you pay these out of your own pocket and they’re due once a year when you file your income tax.
lodging taxes: (also commonly referred to as occupancy tax, bed tax, or tourist tax) are imposed by states, counties, cities, and other local jurisdictions. Your guest/tenant pays the tax, but you’re responsible for adding the tax to the guest’s bill, collecting the tax, filing lodging tax returns, and paying the amount collected.
For instance, If you offer your dwelling for short term renal in Tennessee (89 nights and shorter) you must charge your guest TN Sales tax and local sales tax. It’s your responsibility to fulfilling your lodging tax obligations, this means that, for the most part, you must still file lodging tax returns in order to report your short-term rental earnings and taxes collected.
Some rental platforms may collect and pay lodging tax on your behalf; however, they do not report your earnings, or the amount of lodging tax paid on your behalf to tax authorities. They generally pay all lodging taxes in a jurisdiction in a lump sum rather than reporting amounts for individual hosts.
There are special rules if you rent your dwelling unit for less than 15 days a year, and if you apply for a real estate professional status. To clarify, Real estate professional status has nothing to do with the real estate license agent. In other words, you don’t have to be a real estate licensed agent to qualify for real estate professional status and being a real estate agent does not automatically qualify you.
Fair rental price rule, at risk rule, and passive activity rule need also to be carefully reviewed on a case by case basis.
If your tax adviser didn’t discuss these things with you before, it’s maybe a good sign to change. We, at Taxville Financial, take tax preparation and tax planning to the next level. We take a consultative approach to help you make informative decisions. When you come to file your business taxes, we most likely cannot change the past (In some cases we can!) but, we will provide you with the tax advise and guidance to optimize your business and keep more of what you earn.
Michael Zachary, EA, CPHRC