Do you want to buy your first rental property? Then you might be interested in knowing more about the taxes for short term rentals, in order to know what to expect and how you can reduce the tax burden on your income.
This guide will bring you a solid foundation on what the taxes for short term rentals are, in order for you to start your business the right way.
What Are Taxes for Short Term Rentals?
They are the taxes you pay on the income generated by your rental property. Since we are talking about short term rentals, they will go in function to the number of days you rent the property per year, your material participation and if you provided any substantial service.
How to Avoid Paying Taxes for Short Term Rentals
It is possible to pay zero taxes for short term rentals, as long as you stay at your rental property for 14 days or 10% of the rented days per year, whichever is greater. Therefore, if you want to rent the property 328 days per year, then you will have to live in the rental property for at least 37 days per year.
Once that requisite is met, you also need to keep the stays at a maximum of 14 days. By using this setup, which you can easily control thanks to platforms like AirBnb, you will pay zero taxes for short term rentals.
When Do You Have to Pay Taxes for Short Term Rentals?
The previous setup is when you only have one or two rental properties, but if you have or plan to create a bigger business with plenty of short term rental properties, it means that your average stay might be longer than 14 days. If that is the case, then you will have to report the IRS using Schedule E on your tax return.
The best way to reduce the tax burden is by taking advantage of short term rental property deductions. And you can maximize this even more if your participation is considered as non-passive by the IRS, and that is exactly the point we will cover in the next section.
Also, remember that you might be required to report on a different schedule such as Schedule C, and you might even be subject to SE tax, but this is something that only a qualified accountant will be able to tell you.
Is Your Participation Passive or Non-Passive?
Perhaps you are running this business because you want to use short term rental properties to reduce your income taxes. If that is the case, then you need the IRS to classify you as a material or non-passive participant in the business. In order to accomplish so, here is what you need to do:
- You need to meet at least 1 out of the 7 material participation tests
- You need to keep the average stay at 7 day or less*
*You can keep the average stay at 30 days or less, but you will have to bring a substantial service. Otherwise, you might lose your non-passive participant status.
If you want to learn more about using short term rentals to reduce your taxes, then you should check our article here.
Handle Your Taxes for Short Term Rentals Smartly with Our Help
If you want to handle the taxes of your short term rentals the right way, then we can help you. Give us a call at (786) 310-5582 or write us at [email protected] to book a consultation. We will help you to administer your business correctly to reduce the tax burden legally.
