Contributed by: Phillip B, FreeTaxUSA Agent, Tax Pro
Short-term vacation rental rules
Short-term vacation rentals through Airbnb, VRBO, and other travel websites have become a popular way to make rental income from residential rental real estate. Knowing how you should report this income on your tax return is an important aspect of keeping a rental business successful.
The first step is determining whether the income is taxable, and where the income should be reported.
- Rental income is not taxable if the property is used as a home and the property was rented 14 days or less in a year. If the property was rented less than 15 days, you don’t report any rental income from your short-term rental property.
- If the home was rented an average of 7 days or less per guest and you provided substantial services (like a hotel would) your short-term rental is considered a trade or business that needs to be reported on Schedule C.
- If the home was rented an average of 7 days or less per guest and you DID NOT provide substantial services, you’ll need to determine if you materially participated in the activity. If you did materially participate, you would file on Schedule E but you would not be subject to passive activity loss limitations. If this is the case, you cannot file using FreeTaxUSA.
- If the average stay was 30 days or less per guest and you provided substantial services, this is a trade or business that needs to be reported on Schedule C. If services weren’t provided, the rental is reported as a traditional rental property on Schedule E.
The key factor in determining whether rental income should be reported on Schedule E or Schedule C is whether substantial services are provided.
What are considered substantial services to guests?
One simple way of evaluating substantial services is to ask: is the service or amenity something that would be expected of you if you were the landlord of a long-term rental property – or are you offering hotel-like services? Any services that are out of the ordinary from a long-term rental property and/or hotel-like services may qualify as a substantial service. The following is a list of services that may mean you provide substantial services. The list isn’t exhaustive, and no one item alone means you need to file a Schedule C. Instead, the factors must be considered together.
- Transportation
- Concierge services
- Maid services during the guest’s stay
- Food and beverage services
- Offerings of tours or other tourist activities
- Access to health and wellness products (like massages)
- Any other hotel-like services
Examples
Scenario 1: Jane's beach home short-term rental
Jane has a single-family home near a beach, which is offered on a popular short-term rental website. She doesn’t live on site, but she does have a food gift basket delivered before the arrival of every guest. The site offers free internet and has an available printer. The property is cleaned before and after every guest arrives.
The only factors that weigh in favor of substantial services are the gift basket and the accessibility to the internet and a printer. However, given the fact the gift basket is delivered without request before the guest arrives, and the internet and printer are simply left for the guest to use at their convenience, neither feature considered individually or combined makes the property a hotel-like property. If the stay was more than 7 days per guest, this would be a traditional example of a passive rental activity prepared on Schedule E.
If the stay is less than 7 days, Jane would need to consider whether she has materially participated in the activity. If she doesn’t materially participate, she would simply report the income on Schedule E under normal rental property rules. Conversely, if Jane does materially participate, she will want to file with a tax professional to take advantage of not having passive loss limitations.
Scenario 2: Joe and Johanna's Victorian mansion short-term rental
Joe owns a large, restored Victorian mansion where he lives with his wife, Johanna. They rent out a few rooms through popular short-term rental and travel websites. They offer guest pickup from the airport, a nightly gift platter, breakfast each morning, maid service while guests are out during the day, and a partnership with a local bicycle tour company that picks up interested guests for daily historical tours. This year, like most years, the average guest stay is less than 7 days, and no stay exceeds 30 days.
Since they provide substantial services like daily breakfast, maid service, and concierge-type tour arrangements, the activity is treated as a trade or business and reported on Schedule C, similar to a traditional bed-and-breakfast.
Scenario 3: William's small apartment short-term rental
William has a small apartment near the major business hub of a large US city. The apartment is usually rented out for 2-5 days at a time by business travelers. He doesn’t live on the premises and doesn’t offer any substantial service. The fact that his renters stay in the apartment for an average of less than 7 days means that William must determine whether his participation is passive or material. William tracked both his own hours and those worked by others on the rental property. On average, he spent one hour per month on administrative work, two hours per tenant cleaning the property, and 16 hours over a weekend working with a handyman to repair damages. There were 50 guests for the year. In total, he worked 12 hours on administrative tasks, 100 hours cleaning, and 16 hours on repairs, for 128 hours overall. The handyman spent 40 hours on the repairs.
One of the material participation tests is met if the taxpayer works over 100 hours and more than anyone else on the property. William meets the material participation requirement. He will report his income on Schedule E without being subject to passive loss limitations. However, if he has a rental loss, he will need to file his return elsewhere, since he cannot use FreeTaxUSA for that situation. If he has net rental income, he can still use FreeTaxUSA.