Many people rent out their vacation homes on a short-term basis. Websites like homeaway.com or airbnb.com can make renting your vacation home a very easy process. However, you might be surprised to learn that most states require people who rent out their vacation homes to charge and collect state sales and lodging taxes on the income they earn from short-term rentals.
What Is a "Short-Term Rental"?
Sales and/or lodging taxes are only due on income owned from "short-term rentals." Thus, for example, a landlord who rents out a home on an annual basis need not pay these taxes. What constitutes a short-term rental varies from state-to-state. In many states, any rental less than 30 days is considered short-term. In other states, rental periods of up to six months may be considered short-term and therefore subject to sales taxes.
However, many states have “casual use” rules that excuse rentals of only one or two days per year from such taxes.
How Sales Taxes Work
These taxes are completely separate from income tax and are not collected by the IRS. They are collected by your state, county, and/or city. Like all sales taxes, they are paid by the person who purchases the goods or services (the vacation home renter), not the person who provides them (the vacation home owner). Your role is limited to collecting the taxes and remitting them to the appropriate state and/or local agency. Depending on where your property is located, you may have to pay the sales tax you collect every month or every quarter (three months).
Sales taxes are calculated as a percentage of the rent you collect and are paid in addition to the rent. In some areas there is one rate for the entire state, in others, sales tax rates vary from city-to-city or county-to-county. These taxes typically range from 5% to 15% of the total rent charged. For example, if you rent out your vacation home for one month and earn $2,000 in total revenue for the month, and your sales tax rate is 10%, you’ll have to charge your renters $200 in sales taxes. You must collect and remit the funds to the appropriate agencies--this could be a state, county, and/or city agency.
Sales tax rates and procedures vary from state to state. You’ll need to register your home with your state sales tax agency and, possibly, with your city and/or county. Contact the sales tax authorities for the state, county, and city where your vacation property is located to determine your sales and lodging tax requirements. A list of website links for all state sales tax agencies can be found at www.salesandusetax.com.
What If You Failed to Collect Sales Taxes?
Many vacation home owners are unaware that they need to pay sales tax on short-term rentals, and simply don't collect them. Some go years without collecting such taxes. If you're in this boat, contact your state, county, and/or city sales tax agency to find out what you should do. Coming forward voluntarily can help lower your tax bill because many sales tax agencies will waive the penalties due when you do so.