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.
Many people rent out their vacation homes on a short-term basis. Websites like Airbnb and VRBO can make renting your vacation home a relatively easy process. However, most states require people who rent out vacation homes to charge and collect state sales or lodging taxes on the income they earn from short-term rentals.
These taxes go by different names—for example:
- sales tax
- bed tax
- lodging tax
- occupancy tax
- transient occupancy/rental/lodging tax
- hotel tax
- room tax
- gross receipts tax
- transaction privilege tax, and
- tourist tax.
Here, we'll discuss what constitutes a short-term rental, how sales tax works, and what penalties you'll face if you fail to pay.
What Is a Short-Term Rental?
Sales and/or lodging taxes are only due on income owned from "short-term rentals." So, for example, a landlord who rents out a home on an annual basis doesn't have to 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. However, in some states, short-term rentals are defined as less than 28 days. In other states, rental periods of up to six months might be considered short-term and therefore subject to sales taxes.
Moreover, in some areas, rentals of private homes are entirely exempt from these taxes. In addition, many states have "casual use" rules that excuse rentals for only a few days per year from such taxes.
How Sales Taxes on Rentals Work
The taxes we're discussing 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 might have to pay the sales tax you collect every month or every quarter (every three months).
The amount of local taxes varies, as does how they are calculated. They can be based on a flat fee, rental percentage, number of guests, number of nights the guests stay, type of property involved, or a combination of any of these. 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.
On average, they equal about 12% of the income earned from the short-term rental (including rents, cleaning fees, and other fees). The taxes are typically due monthly or quarterly. The due dates can vary depending on the amount of tax owed.
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 12%, you'll have to charge your renters $240 in sales taxes. You must collect and remit the funds to the appropriate agencies. This could be a state, county, and/or city agency.
You can find excellent summaries of the state and local short-term rental tax rules for each state on the Avalara website.
In many locations, Airbnb and VRBO have entered into agreements with the local governments involved to collect and remit occupancy taxes on behalf of hosts. In many areas, this is done automatically. Check your listings on the short-term rental platform(s) you use to determine for sure if sales taxes are being automatically collected. If not, you can usually manually direct the platform to collect the taxes.
If your rental platform does not collect and remit sales taxes for you, you'll need to do it yourself. That means you'll need to register your home with your state sales tax agency and, possibly, with your city and/or county. You can include the taxes in the nightly price you charge or demand that they be paid directly to you in person in advance when your guests check in. It's a good practice to list the tax as a line item on the bill submitted to the guest.
Alternatively, you can hire a sales tax service company, such as Avalara, to collect and pay these taxes for you.
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.
For more on taxes and short-term rental properties, see Every Airbnb Host's Tax Guide, by Stephen Fishman.
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