Vacation Rental 101: Taxes

Astrid LindstromLeave a Comment

No one enjoys paying taxes, but filing your vacation rental taxes correctly is essential to a healthy business. If you fail to pay your taxes at the city, county, and state levels, you could see your business shut down – or penalized with heavy fines and fees.

Here’s the good news: if you do your research in advance, you can easily stay on top of your tax requirements and develop a good reputation in your community as a professional vacation rental owner who contributes not only tax income, but part-time employment and tourism income to the local economy.

We’ve even got a fantastic tool to help you look up your property’s tax rate within just a few seconds!

Sound good? Let’s talk taxes.

Do I Need to File Taxes?

Almost certainly.

There are a (very) few exceptions, generally reserved for those who rent out their business for less than two weeks of the year. Tax codes vary by city, county, and state, however, which means that even if you rent out your home very little, it’s well worth double-checking whether you have tax obligations.

How Do I Look Up My Tax Rate?

Tax Lookup Screenshot
There’s a simple way to look up your sales tax rate and licensing requirements for your area: this handy tool from MyLodgeTax. They can look up your local tax requirements from your rental address!

What Kind of Taxes Do I File?

Many vacation rental owners mistakenly think they only need to declare their rental income on their annual tax return. This is incorrect! There are usually additional taxes that need to be filed separately (and sometimes as often as monthly). If you neglect to pay these taxes, you might end up under-paying significantly and be on the hook for enormous fees later.

Your vacation rental income is generally designated as “lodging”, and as such you will need to pay lodging taxes – effectively a sales tax imposed on the renter.

You charge the renter the lodging tax, hold that tax briefly in your own bank account, and finally turn around and pay those taxes to the appropriate entities on the correct dates.

The MyLodgeTax tool above will tell you the total tax rate for your property, including city, county, and state taxes, as well as how many returns you can expect to file per year. That said, you should still double-check with your accountant to be sure you’re filing all the appropriate taxes to the appropriate authorities.

What Happens If I Don’t Charge Lodging Taxes?

If you fail to collect lodging tax, you will be liable to the tax collection authorities for the taxes you ought to have charged. For example, if you charge $100/night, and the lodging tax for your area is 10%, your renter should be paying $110/night when taxes are included.

If you fail to charge the renter, you will have $100 in your pocket – out of which you will be expected to pay various governments the 10% tax they were owed. So now you’ve only made $90/night, and may in fact owe additional penalties.

This tax liability gets to be a serious problem if you rent out your property for a significant period of time without charging lodging taxes. 10% of $100 is just $10 – easy enough to fix. But what if you rented out your home to the tune of $50,000 in rental income over the course of the year? You’d suddenly find yourself owing $5,000 out of pocket – which, if you’re not expecting it, can be a serious setback.

If possible, you might find it beneficial to keep all your lodging taxes in a separate bank account so that you can easily access them when you need to. A separate account also keeps you from accidentally spending your tax monies when dipping into your regular income.

When Do You Pay Taxes?

Again, it will vary by city, county, and state. You may have different filing periods for each entity. The 10% lodging tax might break down to 2% to the city, paid monthly; 3% to the county, paid quarterly; and 5% to the state, paid annually.

You’ll need to create a calendar system that helps you track where your taxes should be going and what deadlines need to be met. One of the reasons we recommend looking into your taxes in advance of marketing your vacation rental is so that you don’t get behind on your tax schedule. It’s important to know what taxes to collect and when you’ll owe your first round of taxes in advance of beginning to collect income!

While the MyLodgeTax tool can help you figure out the total amount of tax you’ll owe and how often you’ll need to file, you’ll need to do a little additional research to calculate what percentage of the total tax rate goes to city, county, and state tax collection entities – or, alternatively, get a professional involved.

Where Can I Get Professional Help with My Vacation Rental Taxes?

As you may have guessed, we highly recommend MyLodgeTax, whose team specializes in short-term rental tax code and lodging taxes. Many of our owners use their services to ensure their taxes are always paid on time, and they’ve always been pleasant, professional, and ahead of the game when it comes to knowledge of the various levels of tax regulation.

You can also ask your regular accountant or CPA if they feel capable of advising you on lodging taxes. The tax codes surrounding short-term rentals are very different than those for regular income, however, so you may wind up needing the expertise of a company that specializes in lodging tax.

That said, you should also inform your usual accountant that you are renting out your vacation home, since that income will need to be included in your regular tax return and will likely change the way your income taxes need to be filed. We personally recommend introducing your lodging tax experts and your regular accountant to one another so they can coordinate; it’ll save you the trouble of acting as middleman, and ensure that everyone has the information they need to file your taxes correctly.

This post is part of Evolve’s Vacation Rental 101: The Expanded Ultimate Guide to Successseries, where we discuss the ins and outs of vacation rental ownership for newcomers and experienced veterans alike. Tune in next week for our 101 post on vacation rental insurance coverage!

To be sure you don’t miss a post, download the Ultimate Vacation Rental Success Guide below and we’ll send you an email notification every time we publish a new 101 article. Have questions or want to know how we make vacation rental ownership easy and profitable? Call our Homeowner Consultants at 877.818.1014 (press 2) or click here to learn more about Evolve.