Thinking of renting your property through one of the online sites including Airbnb and VRBO? Did you know that they report all income they pay you to the IRS? There is simply no way to run your income under the radar unless you rent it yourself without using a third party. Even using a property manager will not help you avoid paying income tax. Any entity paying out over $600 per month must report that income to the IRS on a 1099 form. Airbnb hosts sometimes think they can make some money without reporting it. When you receive a 1099 at the end of the year you should be looking for expenses that can offset that income.
Rental income paid in cash
Some run rental properties run “under the table”. Rental income is paid in cash or in-kind to a property owner who fails to report it to the IRS. The minute you put your property out as an Airbnb rental you are engaging in the “Airbnb business”. The good thing is that Airbnb will pay local property taxes for you. The Internal Revenue Service on the other hand will track you down eventually to pay federal taxes if you fail to report income from rentals.
Tax authorities look at rental platforms to find hosts who do not include gross earnings in their taxable income on their annual returns. Earning extra income can become a nightmare if you try to avoid the tax bill.
I have met several people over the years who rent their properties, usually on a month-to-month basis, and ignore reporting requirements. They collect cash and forget that they did so. Rental properties are a good way to launder money and some bad people do this regularly. The IRS understands this and you may be reported by a tenant who lists payments to you on their tax return. Regardless of how the IRS finds out, they will come at a tax cheat hard.
Lodging tax in addition to income tax
In addition to the IRS, local governments may be looking for a piece of the action. There may be lodging taxes in your area. Some areas have a transient occupancy tax or other type of tax on rental income. Also using your property for primary residence and then changing to a vacation rental will affect your local property tax status. You may lose property tax deductions that you were previously receiving.
Further, the use of your property as an Airbnb rental could affect local zoning rules. The online platform may have exposed your business income to local authorities. Your property may not be zoned properly as an Airbnb.
In the area where my short-term rentals are, the state and local government charge a 12% occupancy tax on all short-term rental properties where the stay is less than 30 days. For years, VRBO collected the fee and passed it on to the host to pay their local government.
Third-party booking sites collect and pay lodging taxes
I can not say for sure but there is little doubt in my mind that taxes passed to some hosts never found their way to the IRS or state. A few years ago VRBO changed their policy and started collecting the taxes and paying them to the authorities based upon their tax rules.
Short-term rentals are not welcome everywhere. I know a code enforcement official in a local city who told me that he looks through Airbnb for properties in areas where they are not permitted. He contacts the owner through their listing and meets them in person if possible.
There is a discussion as this person is interested in the property. Questions such as how long have you been renting it are asked and answered. Then the code enforcement officer tells them who he is. During the process of writing up a ticket which will cost them $500 per day for every day it was listed without a permit, they talk about others doing the same thing.
Zoning rules are a big deal
One reason that communities are tough on violators of short-term rental laws is their rental use ordinances. They do not want them in residential areas such as developments. Another is that they want the income that sales and use taxes produce. Some of the short-term rentals in areas that violate their zoning rules are not paying taxes or fees. That hotel tax is important as well as not encouraging people to avoid reporting taxes.
Don’t forget to pay state income taxes if any are due on the income you have earned. The service providers, Airbnb and VRBO will send 1099’s to states that require payment of income taxes. It’s going to be hard to hide from tax obligations.
Most areas permit rentals of greater than 30 days without permits or fees. The average person can rent their property on a month-to-month basis or a long-term basis without any permits or fees. Just because there are no issues at the local level with taxes does not mean that you should avoid reporting the extra money on your income tax return. You may be caught during an audit for something else that you forgot and the auditor can find this “extra money”.
Personal use of rental property is subject to IRS rules
If you are self-employed, be sure to make quarterly tax payments to cover your expected tax bill at the end of the year. If you find yourself in mid-April and you did not make adequate tax payments, you may have to pay an additional fee charged by the IRS.
You should seek tax advice from a CPA if you have income-generating properties. Working with a CPA can help improve your tax situation next year. Keep an eye on your tax liability and use all of the deductions with depreciation available to you.
There are also rules on personal use of a property that you are listing as business income-generating property. The good news is that the rules on paying taxes for personal use of business property require you to keep records. Just be ready for tax season when it comes.
As a business owner, you should be using the tax code to your benefit. Deductions for mortgage interest, real estate taxes along other deductible expenses can help you reduce the total income that you pay taxes on. That tax professional can set up your books and it it should be easy to track expenses and income from there.
Accounting records are crucial
I use a free bookkeeping program online for each of my investments. At the end of the year, my CPA or in your case, tax preparer can gain access to the electronic file and use it to prepare a tax return. It’s a simple way to keep track. All of your income comes into the program via your bank account. The reports are real-time and show your income each month.
Your Schedule C form will list any income and deductions for your residential rental business during the year. Many people take advantage of the many tax benefits plus depreciation so reporting to the IRS and state may be somewhat painless. It’s not uncommon for an investor to report zero income or better yet, a “loss” on their income tax return. This is because depreciation swallowed their income. They actually took more home than they put out. Depreciation must be paid back but the IRS will wait until you sell the property and it is taken from the proceeds.
Stay on the right side of the IRS
What prompted me to write this short blog was a question about whether Airbnb income must be reported. I thought that this was a self-evident question but that’s because of my decades of business experience which I sometimes forget not many others have. Paying taxes is painful to me as it is to most but understanding that someone has to pay for police, fire, military, and essential services, takes some of the pain away.
The last thing I want to see anyone go through is being on the wrong side of the debate with an IRS agent. If you are caught not paying your fair share, it’s not good. The penalties and fees just keep coming.
Frankly, it’s like having a mad dog tugging at your pant leg and will not let go. The IRS will become your new guest. If they start digging, who knows what they may find even from people who have done what they thought was the right thing all along. Some states can be worse than the IRS.
California is one of those states. They will spend $1,000 to collect $100. At least that is what it seems. Fortunately for me, I have only observed the carnage that tax collectors create when they are hot on a case. My advice: Always report accurately and pay your taxes on time.
What happens if you do not report income from your short-term rental?
The following is quoted as a result of asking a simple question: What happens if someone does not report income earned through short-term rentals:
The penalty for not reporting taxes on short-term vacation rental income can vary depending on the amount of unreported income, the taxpayer’s intent, and whether the taxpayer has a history of non-compliance.
In general, the IRS can impose a civil penalty of up to 20% of the unreported income. For example, if you fail to report $10,000 in rental income, you could be subject to a penalty of $2,000.
The IRS can also impose a criminal penalty for willful failure to report taxes. The criminal penalty can be up to 5 years in prison and/or a fine of up to $100,000.
In addition to the penalties imposed by the IRS, you may also be liable for interest on unpaid taxes. The interest rate is determined by the IRS and is currently 7%.
See what I mean? And this information above is about the IRS, state, county, and cities will pile on. When local governments see blood in the water, they will want their due as well. FYI, the IRS is a friendly organization, they tip off other taxing entities when they find a tax cheat.
In conclusion, pay your taxes on any income you earn from rental property. Create a real business, make some money, and grow your investments. Life is better without additional service fees. It’s great to make extra cash but it’s only extra cash after the government takes its piece.
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