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Short-Term Rentals and Tax Problems

Short-term rentals have become a great income opportunity for many people, especially those living in popular tourist destinations. They also have complex tax consequences that can lead to issues for unsuspecting taxpayers.

Be aware of the following tax issues if you use your home as a short-term rental.

Report Rental Income

You need to report all rental income on your tax return. This rule applies if you rent out a room in your main home or an entirely separate residence.

There is one major exception to this rule. You don’t need to report rental income if you use your home as your personal residence and rent it out for fewer than 15 days during the year. If you rent out your home for a once-a-year event, such as a golf tournament, you can keep that money tax-free.

You also need to report cleaning fees, tips, and any other income you earn related to your short-term rental business.

Deducting Expenses

Short-term rentals may involve many tax-deductible expenses, such as:

  • Depreciation
  • Management expenses
  • Cleaning fees
  • Maintenance or repairs
  • Mortgage interest
  • Insurance

Ask your tax preparer or accountant whether these expenses can be deducted on your tax return. If you use your personal residence as a rental, you also need to split your deductions between business and personal use.

For example, if you rent a room in your house that occupies 10% of the total square footage on 20% of the days during the year, you would need to allocate deductible expenses based on these numbers. You could multiply an annual utility bill of $1000 by 10% and then 20%, for a deductible amount of $20.

Some personal expenses, such as mortgage interest, may be deductible somewhere else on your tax return. Other costs, such as utility bills, may be non-deductible personal expenses.

In some cases, you have to figure out whether an expense can be fully deducted or needs to be depreciated over time. Work with a professional tax preparer to make sure you report these costs properly on your tax return.

If you receive an IRS audit notice because of your short-term rental business, contact a tax attorney for assistance.

The Gartzman Law Firm can help you with audits and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.