Income Generator or Tax Headache?
Now is a good time to look at short-term rentals (STRs), which can offer higher returns than long-term rentals (LTRs). STRs (think Airbnb & VRBO) can lead to great returns, but also may lead to higher taxes. Before (and even after) you start an STR, it’s important to understand some of the tax issues related to them. There are some rather important differences between the tax treatment of short-term and long-term rentals. You should keep good records of all income received and all expenses paid in connection with all your rentals. You should also track the number of the days that each of your properties is rented out and the number of days you use them personally.
First things first. Let’s define what a short-term rental (STR) is:
A short-term rental is a rental activity whose average rental period is less than eight days or is less than 31 days if significant personal services are provided.
Significant personal services are services, like maid services, that in total are valued at more than 10% of the rental fee you are charging your guest.
Short term rental activities are not considered rental real estate activities. The losses are not limited to passive activity income and can offset other income like W2 wages or other business income even if you don’t qualify as a real estate professional. However, net income is subject to self-employment taxes of 15.3% on top of your ordinary income tax rates. In addition, since STRs are considered commercial activities and not rental activities, the STR property is depreciated slower over a longer life. For example, non-land real estate classified as a STR is depreciated over 39 rather than 27.5 years.
Short-Term Rental Pros and Cons
- STRs generally produce more revenue than LTRs.
- STR losses reduce nonpassive income such as salaries and business income.
- STR net income is subject to the self-employment tax rate of 15.3%.
- STR non-land real estate is depreciated over 39 (not 27.5) years.