Vacation Rental Tax Legal Requirements
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
You may know that you’re required to obtain a general business license to operate short-term rentals. But in some U.S. states, you may also be required to have:
- A Real Estate Broker License
- A Property Management License
- Other certifications
If you are forming an LLC, your state may require you to appoint a registered agent to serve as the point of contact between your business and the state government. This person will be responsible for receiving and filing tax and legal documents for your business.
Some CEOs choose to designate themselves as their own registered agent. But you can also elect a registered agent service to take on these duties for an annual fee.
To find out what types of registration are required for your business, you should contact a local agency that can provide information about licensure in your state or country.
Tax Liability of a Property Manager vs Owner
Say you manage vacation rental properties on behalf of a separate owner. In this case, you are not required to report on the owner’s income from guests. Also, you don’t have to report the reimbursable expenses you pay to maintain their properties.
What you do have to pay taxes on is the income, fees, and commissions you collect from owners.
Applicable Taxes for Short-Term Rentals
So what types of taxes apply to vacation rentals? Depending on the jurisdictions governing your specific rental properties, there can be several kinds of taxes to consider. These include sales taxes and accommodations taxes that are often labeled as tourist taxes, occupancy taxes, and others.
Most commonly used, the term lodge tax broadly describes taxes collected both from guests and owners.
Income tax, value-added tax or VAT, self-employed taxes, and goods and services tax may also apply depending on the jurisdiction and how the property is managed.
Understand Your Jurisdictions
Taxes don’t only occur at the state or federal level, Therefore, it’s important to know the specific rules, processes, and rates that apply in your tax jurisdictions. These may be at city, county, state, or other levels. Online, you can browse state guides and additional resources about lodge taxes for each state.
Collecting guest reservations using a vacation rental platform like Airbnb or Vrbo may affect how you need to file lodging tax returns. Therefore, you will need to determine how taxes are being collected through each property channel and ensure filings are handled appropriately and on time.
You may be required to file lodging tax returns on a weekly, monthly, quarterly, or annual basis. Again, this is depending on the jurisdiction as well as the number of revenues reported. Understanding the deadlines associated with these requirements and being able to meet them is the only way to avoid late penalties.
These fines can add up significantly, especially for hosts with multiple properties. How much you pay and whether it’s a flat fee or an amount that increases over time will both depend on each property jurisdiction.
Other Tax Filings
In addition to calculating lodging taxes, you will want to include deductions in short-term rental tax filings to help reduce the amount of taxable income reported.
One of the most significant deductions is vacation rental property depreciation, or recovering the cost of the property over its useful life, which the IRS assumes is 27.5 years for residential rental properties.
To help you estimate these deductions, look for an online vacation rental depreciation calculator.
The 1099 Is a Property Manager’s Friend
If you serve as the property manager and do not own the property, you’re also required to report certain information to the IRS. This formation allows them to verify taxes owed by the owner you work with. It is reported on Form 1099, which must be issued to each property owner and any contractor or professional hired to work on a property.
As of 2022, the U.S. only requires a 1099 if a vendor was paid more than $600. One caveat to this is that if you hire a company instead of a contractor (for example, a cleaning company rather than an independent contractor), there is no tax reporting requirement. If an independent contractor was paid more than $600, it’s reported on Form 1099-NEC.
The deadline to submit 1099s to recipients is January 31st after the year being reported. The same documents must be furnished to the IRS by February 28th.
Avoid scrambling at the beginning of the year to get all this information aggregated, calculated, and distributed. Use accounting software that can automatically capture this data and help you complete the forms accurately.
Keep Your Financials Organized
Navigating state and federal tax codes can be complex for businesses that operate in multiple states or countries. Also, there can be confusion about what kinds of paperwork and information business owners are required to send and report on.
Before you can sit down and start paying taxes, you need to have all your financial information in front of you and easy to review. If you are doing any accounting entries manually, one error or typo could create a lot of work for you when taxes are due.
