While maybe not the most enjoyable use of time, filing vacation rental taxes is an essential part of running a healthy business with your second home.
It’s also a really complex subject, as vacation rental tax rules shift from state to state and even county to county. This makes it difficult to navigate varying requirements with confidence.
That’s why we’ve compiled some of the most common questions homeowners want answered. From the different types of tax you may be responsible for remitting, to the nuances of jurisdictions, we cover it all — and provide a few easy ways to make it all feel like less of a headache — so you can get back to prioritizing five-star hospitality.
According to Evolve’s Tax Team, there are three main categories of taxes vacation rental owners need to think about each year.
Filed once a year by the April 15th deadline, income tax is what you pay the federal and/or state government based on short-term rental earnings, minus possible deductions (more on deductions later). It’s just like any other job you hold; you report alongside other sources of income and get taxed accordingly.
Business taxes are levied on owners for the “privilege” of conducting business. They have a myriad of names, including gross receipts tax, business and occupation (B&O) tax, business privilege tax, and more. These taxes are the owner’s responsibility as the provider of goods or services, and are paid to states, counties, and/or cities.
Oftentimes called short-term rental taxes, these are levied by states, counties, and cities. Depending on your taxing jurisdiction, they can also be referred to as a number of other names. Lodging tax, occupancy tax, and transient tax are a few common terms that, at a high level, are synonymous. The rates and rules that apply to each, however, could look very different from jurisdiction to jurisdiction.
Sales tax also falls under this umbrella of vacation rental taxes you may be responsible for. In some areas, lodging tax is collected but sales tax is not, while in others sales tax is collected instead of lodging tax (leading many homeowners to mistakenly think they’re interchangeable). Some homeowners may even have to collect and remit both. It’s best to work with a tax expert to understand the type(s) charged in your area, and to familiarize yourself with the corresponding verbiage.
What’s more, vacation rental taxes differ from income and business taxes because they’re technically paid by your guests — it’s the add-on everyone always sees on the bill. But as the owner, you’re responsible for registering for all taxes you are required to collect, identifying the tax rate(s) for your property (the Avalara MyLodgeTax tool can help), collecting those taxes, and then remitting the totals to your local and state governments.
The short answer: a lot. And unfortunately, there’s no simple way to explain just how widely vacation rental tax rules vary because there aren’t just state-by-state discrepancies. There may also be differing county, city, and special district tax regulations to take into consideration, our Tax Team says. (Again, it’s important to talk to an expert who can help you identify your property’s tax requirements.)
Here are a few other components of vacation rental tax laws that aren’t standardized:
On both state and municipal levels, authorities set specific standards for the types of licenses and permits you need to run a vacation rental business. You may need a general business license, a short-term rental license, or more from your state and/or local government. (Avalara MyLodgeTax can help you identify, obtain, and maintain what’s needed for your property.)
While many assume April is tax season across the board, the reality is that the timing around vacation rental tax filing can depend on your tax registration, the types of taxes you must collect, and regulations enforced by state and/or local jurisdictions. Our Tax Team says some homeowners need to collect and remit lodging or sales taxes annually, but others must do so on a quarterly or even monthly basis. It’s important to understand what your personal tax calendar looks like to ensure you hit the appropriate deadlines and establish a well-oiled system for remittance.
Are cleaning fees subject to tax? What about pet fees, extra guest charges, parking costs? No plot twist here: taxable fees and charges differ depending on your property’s location.It’s typical to find standard cleaning fees and nightly rates taxable, but less universally-applicable charges like pet or parking fees might not be. That’s why, once again, it’s important to be clear on your local laws so you can charge the correct rates (more on that below).
Once you’ve worked out the lodging and/or sales tax rates, filing periods, and taxable charges for your property, it’s time to start collecting vacation rental taxes from guests. Here’s a step-by-step guide for getting organized so you can accurately fulfill all requirements.
Apply or register for the licenses and permits you need with your state and local governments. Organize a calendar for filing period reminders, and create a centralized location to keep track of tax records.
In addition to charging standard nightly rates and fees, our Tax Team says an appropriate tax rate should be applied as an added percentage on a guest’s payment. In your financial records, it’s important to keep the tax rates you charged clearly marked as a separate line item, so it’s easier to calculate totals at the end of a filing period.
Whether you have to file vacation rental taxes monthly, quarterly, or annually, stay on top of deadlines. With a clear understanding of your jurisdiction’s expectations, this part of your process should become operationally streamlined.
Most licenses and permits have expiration dates — our Tax Team notes some jurisdictions require renewal on an annual basis, while others have multi-year terms — so make note of any corresponding deadlines, along with any updated stipulations for eligibility. (Some state and local governments send reminders ahead of time; others may not.) Renewal is ultimately the responsibility of the homeowner, so mark your calendar with enough leeway to ensure you remain in compliance.
Great news: you are allowed to claim deductions on your federal and/or state income tax. Homeowners can write off expenses like mortgage interest, travel costs, and the maintenance fees of home improvements. Familiarize yourself with all of your deduction options before you file income tax returns.
Vacation rental taxes, however, are a different story. Our Tax Team says there are typically no deductions applicable to the tax you charge guests and then remit on state or local levels. But there may be exemptions available based on a longer length of stay by your guest.
Same goes for business taxes: while there are typically no exemptions available, deductions may or may not be possible.
The grey area of it all is why — and we really can’t emphasize this enough — it’s best to consult with a tax professional to understand your options further.
Understanding the complexities of vacation rental tax rules is quite the undertaking, and there’s a lot a homeowner is responsible for keeping track of. That’s why, first and foremost, we recommend utilizing the Avalara MyLodgeTax tool for guidance, and/or hiring a tax professional who can help you master the details.
To learn more about other strategies that help transform homeowners into vacation rental superstars, grab a copy of our comprehensive Success Guide below. It has all the expert insights you need, from creating the perfect five-star guest experience to upping your profits year after year.