The hottest trend for adding another income stream to your assets is turning your residence or rental property into a short-term rental. Third-party vacation booking sites like Airbnb, VRBO, and HomeAway offer homeowners the chance to rent out unused portions of their homes in turn for a little extra cash in their pockets. The homeowner operates independently of the booking site and is in full control of how often they rent or who they choose to rent too.
Sounds pretty good, right?
Running a short-term rental can be a very lucrative way to turn what you earn into a few extra bucks each month, or even seasonally. But if you’re not careful, it could end up drastically eating up your profits, making it a liability instead of an asset.
If you do not have a clear understanding of the rules and the tax implications of running a short-term rental your profit can be significantly less than what you thought. You may have just spent time, money, and energy on an investment that is not worth the return.
Before You Start Renting:
Start with the 3 C’s: Calculate. Calculate. Calculate.
For the recreational renter, it may be a no-brainer, but there is a strategy that allows you to rent your property tax-free for up to 14 days.
For those who have secondary residences that they rent for significant portions of the year the strategy is drastically different, but being a high-volume renter also provides you with a greater opportunity to defer some of the tax burden and risk that short-term rentals carry with them.
When looking at short-term rental opportunities there are several factors in determining what structure or strategy is best suited for the individual’s situation, and you should be looking at these factors as well so you can get a finger on the financial pulse of your investment and the implications of having a short-term rental in your respective states.
The Two Strategies to Consider:
Strategy #1 – The Occasional Renter Strategy
If you are only renting out your property for 14-days or less, you may be exempt from paying taxes on the money you earn. The moment you go over 14 days, without the right business structure the IRS may come in and smack you with some pricey taxes on that income. In most cases, it will take another 16 days for renters to bring you back to the income you would’ve made in 14 days, creating a vicious income vs tax cycle. So if you’re a seasonal or recreational renter, keep this strategy in mind.
Strategy #2 – Secondary Residence Renters
For those who rent out properties that are not their primary residence, depending on how many days you rent for, your tax strategy will be drastically different. Being a high volume renter provides you with a greater opportunity to defer some of the tax burden and risk that your short-term rentals will carry.
When deciding which short-term rental opportunity you would like to explore, there are additional factors that will determine which structure or strategy is the best option for you.
Here are some of the factors you need to keep in mind:
- What state is the property located
- State and Local Laws
- Homestead Exemption Limits and Rules
- Tax implications and status
- Inside and Outside Liability Exposure
- Insurance cost and coverage
- Rental agreements and ancillary documentation
By clearly educating yourself on these factors, you will have a better understanding of the financial benefits of your investment, as well as the tax implications of having a short-term rental.
So, what’s the good news? The good news is that Anderson Business Advisors is ahead of the curve and we have put together a four-part series on the do’s and don’ts of running a short-term rental business, and how to avoid the common pitfalls involved in running them. If you follow our rules you can make the most out of your investment.
For more information about turning your home into a short-term rental property check out my free video series: The 8 Biggest Concerns About Short-Term Property Rentals – https://andersonadvisors.com/the-8-biggest-concerns-about-airbnb/
Tax tips for real estate investors with Toby Mathis, Esq. and Ronnie Withaeger, CPA
The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.
Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.
Here are five of the Dirty Dozen tax scams:
Continue reading “Dirty Dozen Tax Scams”
Are you making a payment with your federal tax return this year? If so, here are 10 important things the IRS wants you to know about correctly paying your federal income taxes.
1. Never send cash.
2. If you file electronically, you can file and pay in a single step with an electronic funds withdrawal. If you e-file by yourself you can use your tax preparation software to make the withdrawal. If you use a tax preparer to e-file, you can ask the preparer to make your tax payment electronically.
Continue reading “10 Tips for Paying Your Taxes”
IRS Tax Tips
1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59½.
2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.
Continue reading “Early Withdrawals from Retirement Plans Tax Rules”
A tax credit reduces the amount of tax you must pay. A refundable tax credit not only reduces the federal tax you owe, but also could result in a refund.
Here are five credits the IRS wants you to consider before filing your federal income tax return:
Continue reading “5 IRS Tax Credits that Can Reduce Your Taxes”
From the IRS…
Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:
• Child support payments;
• Gifts, bequests and inheritances;
• Welfare benefits;
• Damage awards for physical injury or sickness;
• Cash rebates from a dealer or manufacturer for an item you buy; and
• Reimbursements for qualified adoption expenses.
Some income is not taxable except under certain conditions. Examples include:
• Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
• Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.
All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering – the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.
From the IRS…
Six Tips for Charitable Taxpayers
Contributing money and property are ways that you can support a charitable cause, but in order for your donation to be tax-deductible, certain conditions must be met. Read on for six things the IRS wants taxpayers to know about deductibility of donations.
1. Tax-exempt status. Contributions must be made to qualified charitable organizations to be deductible. Ask the charity about its tax-exempt status, or look for it on IRS.gov in the Exempt Organizations Select Check, an online search tool that allows users to select an exempt organization and check certain information about its federal tax status as well as information about tax forms an organization may file that are available for public review. This search tool can also be used to find which charities have had their exempt status automatically revoked.
2. Itemizing. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A. Continue reading “Tax Tips for Charitable Giving”