A responsible Airbnb owner and host should know how to report Airbnb income on tax return. It is the duty of every American to do so.
Table of Contents
- Mashvisor’s Guide on How to Report Airbnb Income on Tax Return
- Reporting Airbnb Income on Tax Returns
- Extensive Due Diligence Is Never Overrated
- Wrapping It Up: How to Report Airbnb Income on Tax Return
Mashvisor’s Guide on How to Report Airbnb Income on Tax Return
You’ve probably already heard of the proverb, “Nothing is certain but death and taxes.” It just means that a person cannot avoid the inevitable. There are things in this world that are just meant to be. And taxes fall under that category.
Filing taxes is one of the most important responsibilities all citizens of a country should fulfill. Taxes fund essential government services and projects that elevate the living standards and conditions of a constituency. Simply put, taxes are the lifeblood of a nation.
For this reason, real estate investors who want to start a rental property business and those who already own an Airbnb business should know how to report Airbnb on tax return income e-file or submit an actual physical document. Let’s talk more about how to report Airbnb income on tax return in this article.
Privileges Come With Responsibilities
Before anything else, let’s establish one thing: Airbnb hosting is a privilege granted to qualified individuals who are responsible enough to run and manage a rental business, including the legal obligations that go with it.
Starting an Airbnb business is a great way to earn some extra cash on the side, especially if the property is located in a market with lots to offer tourists and visitors. Hot real estate markets that attract hundreds of thousands, even millions, by the year generate a handsome return on investment for real estate investors. Markets with high cash on cash return and cap rates tend to also lead to higher Airbnb earnings.
If you’re an Airbnb host or own a vacation rental property, you’re one of the lucky few. Not everyone is given such a wonderful opportunity to produce wealth. However, the privilege also comes with a cost.
Operating an Airbnb rental or even short-term rentals on other similar platforms, like VRBO, come with a long list of tasks that owners and hosts have to dutifully perform. This includes filing income tax returns.
For most folks, tax season can be quite… well… taxing. It is a time when people’s stress levels go through the roof mostly because of all the confusion that goes with the territory.
Most Americans get a bit uptight right around April every year, and understandably so. However, if a person knows, at the very least, the basics of tax filing and reporting, he or she would probably be less anxious when tax season rolls around. It is where knowing how to report Airbnb income on tax return comes in very handy.
Reporting Airbnb Income on Tax Returns
When it comes to rental properties though, especially vacation rentals like an Airbnb business, reporting one’s income can get pretty confusing. An Airbnb host or owner could fall under one of two major categories: income tax and lodging tax.
What do the two tax types have to do with an Airbnb host knowing how to report Airbnb income on tax return? A lot more than one can expect. Let’s take a look at each type of tax that needs to be reported.
Income Tax
Income taxes are generally levied by the government (on both the federal and state levels) as a percentage of your overall income for the year. An Airbnb host pays such taxes out-of-pocket annually.
By law, short-term rental owners should report the income they make off their vacation rental properties to the IRS as part of their total income. However, certain workarounds can be done to reduce the taxable income amount like rental property tax deductions. The deductions can include expenses related to the management and operation of an Airbnb property such as:
- Property upgrades and improvements
- Regular maintenance
- Operating expenses
- Airbnb and other vacation rental platform fees
- Travel and transportation
One exception to the above requirement is what we call the 14-Day Rule. For rental properties that rent out their place for a period of 14 days and below, Airbnb hosts and owners don’t need to submit a report on their income. However, not reporting the said income also means they don’t get to take advantage of deductions on taxes on rental income.
However, if rental property owners itemize their deductions overall, they can still take out the normal mortgage and property tax deductions for their properties.
Income Tax Reporting by the Rental Platform
For most income sources, the amount of income made by an individual is reported to the IRS by the source of the said income. The individual will then receive a copy of the report containing a summary of the income earned.
When it comes to the tax on rental income, Airbnb might not give you an earnings form if you only earned less than $20,000 in a year. However, if you earned north of $20,000 and generated more than 200 bookings in one year, expect to receive Form 1099-K, Payment Card, and Third Party Network Transactions. It is because a lot of vacation rental platforms are considered payment settlement entities.
Now if the online platform you’re on withholds federal taxes for you, you will be given a tax form that states the amount withheld. If you want to change the amount withheld for each calendar year, you may submit a W-9 form for such a purpose.
Let’s say that you rented out your property for less than 14 days in a year and still Airbnb reports the income to the IRS, you just need to show proof that it was only rented for less than 14 days to resolve the issue. It is important in knowing how to report Airbnb income on tax return to minimize confusion about one’s income taxes.
Lodging Tax
In contrast to income taxes, lodging taxes are levied by the state and local governments on accommodations. It simply means that the guests pay the tax. However, it is the rental property owner’s responsibility to add the taxes to the bill, collect the tax, file the lodging tax returns, and pay the amount. Depending on the location and the jurisdiction, lodging taxes can be due monthly, quarterly, or yearly.
Reporting for lodging taxes can be quite complicated compared to the more straightforward income tax filing. It is because you might need to report both your short-term rental earnings, as well as money collected as lodging taxes. It will depend on the jurisdiction where the rental property is located. If your rental platform also collects taxes from guests on your behalf, your reporting requirements will also be affected.
Understanding Lodging Taxes
As we already mentioned, hosts and vacation property owners may be responsible for lodging taxes in several jurisdictions. Typically, lodging taxes are made up of different taxes imposed by several government entities levied on accommodations. They can be sales tax, transient occupancy tax, hotel tax, bed tax, city tax, and more.
All the different taxes applicable to a rental property will be added to come up with the final tax rate hosts will charge their guests.
For instance, the Orlando, FL scene requires Airbnb hosts and vacation rental owners to collect taxes that include a 6% state transient rental tax plus a 0.5% county discretionary sales surtax that is administered by the government. Additionally, they are also required to charge an additional 6% tax for tourist development that is administered by the county.
Tax Jurisdictions
It is very important for hosts to know which tax jurisdictions their rentals fall under so they can report their Airbnb income accordingly to avoid non-compliance fines and penalties.
Filing lodging taxes is one thing, as a host only needs to simply report the Airbnb earnings and the amount of tax collected. However, before one can even collect and file said lodging taxes, the owner needs to ensure that they are registered with the right jurisdiction for a license or permit to collect lodging taxes from guests.
For most locations, applying for a tax permit can be easily done online. Fees will vary depending on the location and jurisdiction. Once registered, a host can start collecting lodging taxes from guests.
After registration, the local jurisdiction should provide essential information on reporting and filing lodging tax returns. It includes frequency and the deadlines for filing. Missing deadlines will entail varying amounts in penalties and fines based on the location and jurisdiction.
Most jurisdictions offer online filing options to make it easier for rental property owners to file lodging tax returns. Filing online will still require stating the amount of short-term rental income made in a period. Payments are usually done via electronic transfer or check. Credit card payments are also accepted by most jurisdictions; however, keep in mind that paying with a credit card comes with certain fees and charges.
Vacation rental property owners and Airbnb hosts should also note that they are required by most jurisdictions to still file by the deadline regardless of whether income was made or not within the coverage period.
Lodging Tax Collected by the Rental Platform
Rental platforms like Airbnb and VRBO collect lodging taxes on the owners’ behalf in some jurisdictions. It means that they add applicable taxes to the guests’ bills, collect them, and pay for them in the local tax jurisdiction the rental property is in.
The thing about the above platforms is although they collect lodging taxes in hundreds of locations and jurisdictions across the US, there are some jurisdictions that they don’t. And they also may collect a portion of the taxes owed and not the entire amount.
Let’s take Austin, TX as our example. Vacation rental hosts in Austin are required to collect and pass on to local tax authorities a total of 17% lodging tax from guests. It is the sum of 6% state hotel occupancy taxes and 11% city hotel occupancy taxes. Rental platforms Airbnb and VRBO collect the state taxes but it falls to Austin rental property hosts to collect and pay the city taxes themselves.
Take note that, in most cases, the rental platforms do not report your earnings and paid lodging tax. In Indiana, for instance, vacation rental marketplaces are required to collect taxes on your behalf once your place is booked. If the lodging tax is not collected, you as the host or owner are required to report the lodging taxes.
In most jurisdictions, however, it is still a must for rental property owners and hosts to file their lodging tax returns to report their earnings and collected taxes, even if the rental platforms are collecting on their behalf.
Obtaining the above information on how to report Airbnb income on tax return will make filing taxes a lot less complicated.
Extensive Due Diligence Is Never Overrated
Knowing where you stand with your taxes as rental property owners is a big part of performing due diligence. Due diligence is never just about researching market information and analyzing rental market data. It is easier to do both things with a website like Mashvisor.
Mashvisor is an online real estate marketplace that specializes in helping real estate investors find the right properties that fit their investment needs. They offer users access to essential investment tools, such as:
- A massive and highly accurate real estate market database that covers almost all areas of the US
- Property finder tools that allow users to locate the best investment properties in their markets of choice
- A real estate heat map that allows them to evaluate neighborhoods based on how they perform in certain categories
- An investment property calculator that helps them make accurate projections based on real-time market data. It includes an Airbnb calculator that also takes into account local taxes
Mashvisor’s Airbnb calculator allows investors to determine the profitability of their real estate investments, taking into account local taxes.
Mashvisor may seem like a one-stop-shop for real estate investors. However, they also need to consider reaching out to tax specialists where their rental properties are located so they know what they’re working with. It should give them a better idea of how to report Airbnb income on tax return and other tax-related concerns regarding their investment properties.
Regardless of whether the property is rented out as a long term Airbnb rental or rented out for 14 days or less, Airbnb rules still require hosts and owners to fulfill their rightful obligations as citizens and pay their taxes. It is the cost of being able to enjoy the wonderful privilege of owning a vacation rental property.
Wrapping It Up: How to Report Airbnb Income on Tax Return
Knowing how to report Airbnb income on tax return is a huge relief for Airbnb operators. You don’t need to be a tax expert to understand the complicated ins and outs of filing a tax return as a vacation rental owner. Having sufficient knowledge about the subject matter can minimize the stress of tax season.
Knowing your tax obligations is a big part of performing your due diligence as an investor and business owner. Of course, a good part of it also involves market research and data analysis, including making accurate computations that factor in the applicable taxes. Mashvisor has helped thousands of investors perform due diligence and find the right properties that line up with their goals and criteria.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.