Two weeks or
less and you pay no income taxes
And the magic number is...14.
Rent out a couch, a spare room or your whole house for a total of two weeks or
less during the tax year and you'll pay nothing in federal taxes on the extra
income.
One of the best Internal
Revenue Service (IRS) breaks available, this tax break is sometimes known as
"the Masters exemption" because so many people take advantage of it
every year during the big annual golf tournament in Georgia.
It doesn't matter whether you
earn $100 or $10,000 during those 14 days that you rent out space — you don't have to report the
earnings on your taxes. However, to qualify, you must:
- Rent part
or your entire house for no more than 14 days during the year
- Live in
the house yourself for more than 14 days during the year or at least 10%
of the time that you rent it to others.
One exception worth noting: Some
companies that facilitate short-term rentals — like Airbnb and FlipKey — may report your rental
income to the IRS no matter how many days you rent.
So, even if you qualify for the
Masters exemption at the end of the tax year, you might get an IRS letter about
the rental income. You'll need to prove that the amount is not taxable because
you did not exceed the 14-day limit.
Renting for
15-days or more changes everything
Step over the annual 14-day
limit, even by one day, and you'll be in completely different tax territory.
The Masters exemption disappears, and rental income — including the amount you made
in the first 14 days — becomes taxable. Your tax rate will vary depending on
the total amount of income you report on your state and federal tax returns.
The bright side is that you can
deduct 100% of direct rental expenses from the short-term rental income,
including:
- Rental
agency fees
- Credit
checks
- Cleaning
expenses
Other expenses, like mortgage
interest and property taxes, must be split up between personal and business use
of your residence.
Note, that the money
you make from short-term vacation rentals is considered rental income for tax
purposes even if you are a renter yourself and don't own the property.
Some cities and states
charge occupancy taxes on short-term rentals. Although the guest
usually owes the amount of this local tax, you, as the host, may have to
collect and pay it. Sometimes the rental company collects and pays the
local tax for you.
Additional Resources:
