April 2022 – Vacation Rentals
As more and more individuals utilize the vacation and short-term rental market to rent out their home or second home and make some quick cash, it is important to consider the tax effects of these activities and keep best practices in mind.
There are many third-party platforms that assist homeowners in listing their homes for short-term rental periods – among these are AirBnb, VRBO and FlipKey. These third-party platforms generally assist in listing the property, accepting booking requests, collecting the rental income, and also sometimes withholding tax. At the end of the year, some of these third-party platforms provide homeowners with forms 1099-K if they made over $20,000 to help report their income for tax purposes.
There are a few important items to keep in mind if you rent out your home, a room in your home, or your second home:
- If you rent your property out for 14 days or less out of the year, you are exempt from reporting the income and related expenses on the rental. Please be sure to maintain records showing you only rented the property out for 14 days or less so you are able to substantiate this to the IRS should they request more information. If you rent your property out for more than 14 days of the year, you will need to maintain records on the related income and expenses and report these items on your tax return.
Rental Property & Personal Use Property
- According to the IRS, it is important to distinguish between a personal-use property and a residential rental property when you both live in and rent out your home. If you use the property for personal purposes during the year for more than 14 days or 10% of the days you rent the property out to others (whichever is greater), the property should be treated as a personal residence and not a residential rental property.
- If you are using a third-party platform to manage your rental such as Airbnb, VRBO, or FlipKey – we recommend providing them with a completed Form W-9. If you do not provide them with a completed Form W-9, many of these companies and others are required to withhold 28% of your rental income for tax purposes. If you provide your third-party platform with the W-9, they are generally able to reduce this large withholding. It is more advantageous to receive all of your rental income upfront and then determine what you need to pay in for estimated taxes throughout the year (if any) rather than be subject to the large automatic 28% withholding all year.
Best Practices – Recordkeeping
- It important to retain your own records to support the income and expenses you report on your vacation rental properties. Even though several third-party platforms such as AirBnb and VRBO sometimes assist in income collection and provide a 1099 at the end of the year, it is best to also keep your own records in the event that the IRS asks for additional information. The information you will want to retain includes documentation related to all income, expenses, and number of days you rented the property out, along with the number of days you used the property yourself.
Best Practices – Expenses
If you rented your home or second home out for more than 14 days out of the year, you will need to report the income from that rental on your tax return. As the income will be reported, we encourage you to track all ordinary and necessary expenses associated with that income to help offset the income. If you rented out a portion of your home, you will want to adjust these expenses to reflect just the percentage/portion of your home being rented out. Allowable expenses include but are not limited to the following:
- Mortgage interest
- Property tax
- Management fees
- Third-party platform service fees
- Guest service/host fees
For more information on IRS guidelines related to rental income, expenses and recordkeeping, please visit the link here. For a comprehensive outline from the IRS on residential rental property including vacation rentals, please see the website here.
Keep In Mind – Occupancy & Sales Tax Rules
- Also known as “tourist tax” or “room tax”, occupancy tax is required from vacationers when they use a rental property. The occupancy tax rates depend on the location of the rental. Depending on the location, property owners may need to collect and remit this tax themselves if their third-party platform does not collect them. Please be sure you understand the occupancy tax requirements for the location of your vacation rental properties, and remit the tax accordingly if your third-party platform does not do so. For more information on occupancy tax in Colorado, please visit the link here.
- According to the Colorado Department of Revenue, anyone who offers rooms or accommodations for rent (outside of specified governmental entities or charitable organizations) is required to obtain a sales tax license and collect the tax on any taxable rentals. For more information on Colorado sales tax, please visit the website here.
As always, please feel free to reach out to us with any questions.
JUNE 15, 2022 – 2nd quarter estimated payments for 2022 are due to the IRS and Colorado Department of Revenue
SEPTEMBER 15, 2022 – 3rd quarter estimated payments for 2022 are due to the IRS and Colorado Department of Revenue
EMPLOYEE SPOTLIGHT: JAIME DYREK
Jaime joined Soukup, Bush & Associates in June of 2021. She graduated from the Colorado State University System in December of 2018 with a Bachelor of Science in Accounting. Growing up in Michigan, she spent the first few years out of high school working in manufacturing and transferred her knowledge into private sector accounting over the last 9 years working in manufacturing and retail industries. She currently assists in bookkeeping as well as tax preparation for both individual and business returns.
Outside of work, Jaime enjoys spending time with her husband, two children, and beloved pups, all things hockey-related, good food, and game nights.