August 12, 2016

A Guide to Vacation Rental Income Tax

Bloomberg recently published an article about growing tax revenue problems that have arisen with the widespread use of sharing economy giants like Airbnb. In a study delivered to Congress, it was revealed that billions of dollars in taxable rental income are likely being underreported each year.

The study, done by researchers at American University, also revealed that more than 2.5 million Americans use sharing economy platforms like Airbnb, VRBO, and Uber to earn income each year. These platforms, however, do not withhold taxes on the income that they pay out to earners.

While the IRS has required that Airbnb and other companies notify the IRS of the rental income by providing 1099-K forms, two-thirds of the individuals who earned income from the platforms say they never received a statement of their earnings.

Here is what to know about vacation rental income tax:

Small businesses and individual taxpayers bear the burden

While the tax agencies and the government sort out how to hold these companies accountable for reporting income earned on their platforms, individual taxpayers and small businesses are ultimately left on their own to figure out the tax consequences of their income-generating activities.

Unlike Airbnb, Uber, and other sharing economy companies, most individual taxpayers and small businesses do not have the legal resources and budget to wage a costly legal defense against tax agencies that are looking to collect on unpaid revenues. As a result, the people who use these platforms as sellers are at a greater risk of being audited and being assessed tax penalties.

How to properly report your earnings & avoid an IRS audit

As a small business owner or sole proprietor, figuring out exactly what you owe at tax time is difficult. By accurately reporting your earnings and being precautionary when reporting your income, it’s easy to avoid problems.

Here are a few tips to help:

  1. Take deductions that are realistic. If you take a deduction on your taxes, make sure you have proof that the deductions are legitimate. If you are not sure if you are eligible for a specific deduction, consult a licensed tax professional.
  2. Request income statements or 1099 forms. By requesting proof of your earned rental income, you will have accurate records to back up the income you report on your taxes.
  3. Check your math. If you earn income from more than one source or sharing economy platform, make sure that you have reported all of your income.
  4. Know when to file. If you owe taxes, you are still expected to pay the required taxes by the due date. Even if you request an extension, you may face penalties.
  5. Find out about state and local requirements. In addition to federal taxes, you may also owe state and local taxes. Make sure you file the appropriate forms with these agencies as well.

Use a property management company to manage your vacation home

A reliable property management company will help you stay on top of the paperwork that is needed to properly file your taxes, and ensuring that you have the proper documentation to properly file your taxes is one of the major benefits of using property management.

While property management services perform regular maintenance tasks and repairs for your property, they also collect and remit occupancy taxes on your behalf. They make sure that rent payments are collected each month to allow for timely payments of property taxes. Property management companies provide statements of income for you to give to your tax professional so that you have accurate records of your rental earnings.

If you have serious concerns about rental income tax compliance, using a property management company is a better option than self-management. The fees charged by a property management company are also a tax-deductible business expense that you can claim.

If you are still unsure about how to properly file your taxes, don’t do it alone. Seek out the advice of a qualified tax professional to help you prepare your taxes. By doing so, you can save yourself a lot of trouble while eliminating the risk of major tax problems that could later arise.

If you have any questions about how to declare your Airbnb rental income, please feel free to contact Shared Economy CPA.

Derek Davis has been formally trained in tax accounting at PriceWaterhouseCoopers LLP and Deloitte Tax LLP with over half a decade of professional taxation experience. Additionally, he is a Certified Public Accountant and has helped clients throughout the United States and is licensed in the State of California.

Derek decided to devote his time and efforts to the sharing economy after speaking to an Uber driver one night in May of 2014. The driver informed Derek that the fares for drivers were constantly being cut and that he was worried that he would not be able to support himself and his family given his current level of income (not to mention covering his taxes due at the end of the year). Saddened by his story, Derek informed him that he would be able to deduct approximately $10,000 a year from his income if he decided to depreciate his car over a 5 year period. The excitement he saw in his eyes showed Derek that he was completely unaware of various tax savings advantages that he could take as an 1099 Independent Contractor operating in the shared economy.

After this experience, Derek began speaking with all sharing economy participants and came to realize that there was a huge knowledge gap (and more importantly tax saving) available to people. From then on, he devoted his time to helping people identify and apply tax savings to keep all their earning in their pockets.

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