The Tax Implications of Short-Term Rentals
Beautiful northern Michigan! Lovely surroundings, increased tourism and the proliferation of web sites such as Airbnb, VRBO, and HomeAway have led to a boom in short-term rentals in northern Michigan.
What, if any, are the tax implications of a short-term rental? The answer depends on a number of factors, including how often the property is rented and if any personal use of the property occurs. A short-term rental is generally considered to be a few days to a week and includes the rental of all or a portion of a home, apartment, condo or vacation home.
In most cases, income received from a short-term rental must be reported on your income tax return. Expenses directly related to the rental and considered “ordinary and necessary” such as cleaning, maintenance, advertising, depreciation and supplies are fully deductible from rental income. Expenses that are indirect (apply to both rental and personal use) such as utilities, property taxes and mortgage interest, are typically allocated based on personal use days versus rental days.
A short-term rental may also involve the exclusive use of a portion of a home for rental use only. In other words, the owner may live in one part of the dwelling while renting a room or other space exclusively as a short-term rental. Income from this type of rental must also be reported on your tax return with direct expenses being deducted fully from income and indirect expenses allocated by square footage or some similar method.
A loss on a short-term rental property may or may not be deductible on your tax return. The tax rules related to the “deductibility” of losses are complex, so it is best to consult your tax advisor regarding your particular situation.
USE TAX, HOMESTEAD EXEMPTIONS
In addition to income tax considerations, many states impose a “use tax” (similar to sales tax) on short-term rentals. In Michigan, a six percent use tax applies to any stay of 30 days or less and includes the rental of vacation homes, second homes, townhouse, condos and rooms in private residences. The tax is collected by the taxpayer from the renters and is required to be remitted directly to the state. Taxpayers must register with the state in order to remit use tax.
Regulations regarding short-term rentals vary from township to township. Make sure to confirm that short-term rentals are allowed in your township and if any permits or licenses are required.
The short-term rental of a portion of your home may also affect your homestead exemption. This will depend on the portion used as a rental and the level of activity.
Plan to keep good records documenting rental versus personal days as well as receipts for all expenses. You will be less likely to miss important deductions and you will have support for your income and deductions in case of an audit.
Airbnb, HomeAway and VRBO may report the rental income collected for your rental on a Form 1099 that both you and the IRS receive. This means the IRS will be looking for this income to be reported on your tax return. The income reported is typically before any deductions for service fees, refunds or allowance, so you will want to keep track of these additional costs and report them as deductions to your income.
A short-term rental can be a wonderful way to share the beauty of northern Michigan and possibly have a bit of income as well. Knowing the rules related to tax reporting, record keeping, use tax, and local and township ordinances can make short-term renting a great experience. Be sure to consult your tax advisor to discuss the particulars of your short-term rental.
Jenifer Carmody-Stiebel, CPA, joined Dennis Gartland and Niergarth in 2011 and is a Tax Senior Accountant. She focuses on tax services for business and individual clients as well as personal property tax.