Are you thinking about listing your property for short-term rental through a company like Airbnb or Vrbo? The popularity of short-term rentals through these type of commercial services has become extremely popular.
But, like many things in life, short-term rentals carry with them numerous legal and tax issues a property owner needs to think about. First and foremost, it is important for the owner to understand how the laws work in the municipality where the property is located. Some cities have laws that restrict your ability to host paying guests for short periods.
These laws are often part of a city’s zoning or administrative codes. In many cities, you must register, get a permit, or obtain a license before you list your property or accept guests. Certain types of short-term bookings may be prohibited altogether. Local governments vary greatly in how they enforce these laws. Penalties may include fines or other enforcement. It is important you have a clear understanding of these laws before you act.
In some tax jurisdictions, companies like Airbnb will take care of calculating, collecting and remitting local occupancy tax on behalf of the renter. The rental service you use can provide you with details on how, or if, they handle those taxes.
Liability protection is also important in case a guest is injured or dies while using the property. Both Airbnb and Vrbo provide liability insurance and that is all explained in the owner contract with the company you use. However, it is critical that an owner advise their personal insurance agent that wrote the policy for the property. Some insurance policies do not provide coverage if the property is being used for commercial purposes. Renting is a commercial use. An owner should know the full extent of their coverage and the exceptions for coverage clearly. An owner can also ask the policy provider if there is an endorsement they can provide to confirm the fact that there is coverage.
There are also tax consequences. An owner can rent out all or part of their home or apartment for up to 14 days per year. All rent received during this period is tax-free, no matter how much the owner earns. In fact, an owner does not have to report the income to the IRS. Rental income is tax-free if, during the year the owner rents out their home for 14 days or less, and the home is used personally for more than 14 days, or more than 10% of the total days it is rented to others at a fair rental price. An owner needs to keep careful track of rental or non-rental days.
If an owner rents their main residence (house or apartment) for more than 14 days during the year, and live in it 15 days or more, the owner does not qualify for the tax-free treatment described above. Instead, the owner is required to report and pay income tax on the rental income by filing IRS Schedule E along with their tax return. However, the owner would be allowed to deduct rental-related expenses, within strict limits.
Overall, if you are looking to rent your home or apartment, it is very important that you check with your tax professional before putting your property into a rental program. Your tax professional will explain the best form of record keeping and what you will need to provide to them when it does come time for them to prepare your tax returns.
Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.