- September 21, 2022
- Posted by: Gunveen Bachher
- Category: U.S Taxes and Businesses
Short term rentals do not necessarily mean you have to rent out your property on Airbnb and VRBO. For example, there are investors who specialize in looking for properties close to airports. These types of properties may be ideal as short-term rentals for flight attendants who have overnight layovers.
a) Did you know that you if you rent your primary home or vacation home for less than 15 days, you don’t have to pay any taxes on that income that you earned? It’s known as the Augusta rule.
b) Also, that there is no restriction on the dollar amount of rental income that could be tax free. In other words, if Mr. A rented out the apartment for $10,000 a night and that would lead to $140,000 in income, he would receive the entire $140,000 of rental income completely tax free. Wow!
c) A small downside would be that Mr. A would not be able to write off any rental related expenses on this property. Example, if he bought new linens and supplies for his guests, he would not be able to write those off.
However, he would still be eligible to write off 100% of the mortgage interest and property taxes on his Schedule A, just as he would if he didn’t have the rental income.
There are two ways you can run your short-term rentals:
1) As a normal business where you offer hotel type services to the guests. Example, you offer food and beverages, daily cleaning and operate like a B&B or an inn.
You might end up paying self-employment taxes BUT you will be eligible for the 20% QBI tax break.
2) And in case your short-term rentals are not being run as business and does not provide hotel type services, then the income would be treated the same way as income from regular long-term rentals. No self-employment taxes to be paid in this case. And you might or might not be eligible for the 20% QBI deduction. (Check one of my previous newsletters on whether rental income qualifies or not for the 20% tax break).
If you decided to stay at an Airbnb owned by one of your competitors so that you could see what things you can improve on for your own rental, that might also be a legitimate tax deduction. 🙂
Short Term Rentals is a great tax planning tool.