With the increasing popularity of short-term rentals thanks to Airbnb, VRBO, and other vacation rental platforms, it’s important to understand some of the tax issues related to owning and operating short-term rentals.
Passive vs. Non-Passive Activity
Unlike traditional long-term rental properties that are considered passive activities by default, short-term rental properties are not considered rental activities if one of the following tests are met:
- The average period of customer use for such property is seven days or less;
- The average period of customer use for such property is 30 days or less, and significant personal services are provided by or on behalf of the owner of the property in connection with making the property available for use by customers
This means that if you have losses from a short-term rental business, and materially participate in the activity, you can use those losses to offset non-passive income (e.g. salary from a W-2 job) without qualifying as a real estate professional.
To demonstrate material participation in an activity you must meet one of the same seven tests described in the real estate professional section. The following three are the most common:
- The individual participates in the activity for more than 500 hours during such year;
- The individual’s activity constitutes substantially all of the participation in such activity (including non-owner activity);
- The individual participates in the activity for more than 100 hours during the taxable year and such individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual;
The good news is, unlike the real estate professional status, the time each spouse spends on short-term rentals will be combined to meet the material participation tests. In addition, unlike the real estate professional status, you do not have to spend 750 hours and more than half your total time to make this work.
Considerations Renting Your Primary Residence or Vacation Home
For the purposes of this section, we assume you and/or your relatives stay at your vacation home for the greater of 14 days a year or 10% of the days rented.
14 Days or Less
If you rent out your primary residence or vacation home for 14 days days or less throughout the year you do not have to pay taxes on the income. Because your income isn’t taxable, you also can’t deduct your expenses.
15 Days or More
If you rent your primary residence or vacation home for more than 15 days, then you must report your income on Schedule E of your tax return. However, your expenses are only deductible to the extent of your income. Any remaining expenses will be carried forward to offset income from this activity in future years.
Check out more topics on rental property tax deductions:
- Rental Property Accounting Basics
- 9 Common Landlord Tax Deductions
- Business Travel Expenses for Rental Owners
- Pass-Through Deductions and Casualty Losses
- Rental Property Depreciation Overview
- Capital Improvements vs. Repairs and Maintenance Expenses
- Passive Activity Limits and Passive Losses
- Capital Gains, Depreciation Recapture, and 1031 Exchange Rules
While reasonable efforts were taken to furnish accurate and up-to-date information, we do not warrant that the information contained in and made available through this guide is 100% accurate, complete, and error-free. We assume no liability or responsibility for any errors or omissions in this guide.