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 only taxable if the property was rented 15 days or more in a year. If the property was rented less than this, you don’t report any rental income from your short-term rental property.
- What was the average number of days per guest that the property was rented? If the property was rented for an average of 7 days or less, the rental isn’t a passive rental activity, and it should be reported on Schedule C.
- Did you live on the premises, or did you provide substantial services to your guests? If not, you would report the short-term rental income on Schedule E (this is the most common way to report this income).
- If you either had an average per guest length of stay of 7 days or less, or you lived on the premises and/or provided substantial services to the guests, you would report the short-term rental income as business income on Schedule C.
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 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 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. This would be an example of a Passive Rental Activity prepared on Schedule E.
Scenario 2: Joe owns a large, restored Victorian mansion where he lives with his wife Johanna. They have a few rooms that they offer through popular short-term rental and travel websites. They offer guest pick up from the airport, a gift platter every night, breakfast every morning, maid service while the guests are out during the day, and they have a partnership with a local bicycle tour company to pick up interested guests every day for historical bicycle tours.
Many factors weigh in favor of this being treated as a self-employment short-term rental property. Joe and Johanna offer transportation, daily food and beverage services, daily maid service, and concierge services such as a tour offered by an outside contractor. This is a classic bed and breakfast and should be reported as self-employment income on Schedule C.
Scenario 3: 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 the income and expenses aren’t passive income reported on Schedule E, but a trade or business reported on Schedule C.
