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The Vacation Rental Taxes Fundamentals You Need to Know

Having a vacation rental home is pretty amusing! You not only spend some quality time with your family and friends in your second home but also generate some income to offset the property’s expenses by renting it out to guests when you do not use it yourself. With the help of OTAs, you can offer your entire home or a room for rent and receive bookings as easy as ABC. It sounds cool, doesn’t it? No, hold on! Actually, it is a little more complicated than you might think since there are lots of stuff you have to take care of as a vacation rental host, on top of which are vacation rental taxes that should be handled cautiously to avoid costly shocks at the tax payment time.

Tax rules are complicated and frequently change, so understanding them ahead of time can help you eliminate your income taxes entirely or keep them to a minimum amount and make your vacation rental business more lucrative. Vacation rental taxes pretty much depend on the location of your property and tax legislations. However, the number of days that the property is rented out each year and the amount of time the owner uses the home personally is the most important controlling factor in most laws. Sometimes, even one day can make a significant change in the amount of your vacation rental tax. Therefore, as a vacation homeowner, you should arm yourself with the essential knowledge of vacation rental taxes and revenue management; or else ask for a vacation rental manager or a tax professional’s helping hand.

The 14-Day Rule

The most famous vacation rental tax rule is the‘14-Day Rule’ issued by IRS (The Internal Revenue Service of the United States federal government), also known as ‘The%10-Rule’ and highly depends on the number of days a vacation home is rented out.

Rent Out Your House for 14 Days or Fewer

Your property is considered a personal residence should you limit your property rent out to 14 days or %10 of total days your home is rented during a tax year. In this case, you would be exempt from paying income tax and reporting rental income, and you are not allowed to deduct your rental-related expenses from your income.

Rent Out Your House for More than 14 Days

If you rent out your property for more than 14 days and also use it for personal purposes, it would be considered as a rental house, and you would be known as a landlord, so you must report your rental income and are eligible to deduct your rental expenses from your income, but you need to allocate costs between the time the property is used for personal purposes and the time it is rented. Vacation rental or serviced apartment owners can deduct certain rental expenses from their income such as property managers’ fees, maintenance expenses, property taxes, depreciation deductions, Insurance and utilities, which are precisely specified by the IRS. Also note that:

  • The IRS requires US companies that process payments like Airbnb, HomeAway and VRBO to report the income of the users who earn more than $20,000 and have over 200 transactions in a calendar year and issue a 1099-K form for them. 
  • This rule applies to renting out a part of your property, say a room, or the property as a whole.
  • We are talking of ‘days’ in this rule; however, it’s the nights of the stay that actually should be counted.
  • Allowing someone to stay in the property for free or less than the fair rental rate is considered a personal use day by you.
  • You must prorate the expenses you incur between personal and rental use if you own a home that you live in a part of the year and rent out the rest.

Vacation Rental Tax Rules in the UK

Income Tax is the main tax you have to pay on an ongoing basis for a vacation rental property as a host. The tax you pay on the rent you receive from your guests depends on the amount of profit you make or your net rental income, which is figured out by subtracting all of the allowable expenses from the sum of the rental income you receive from various properties. There are some detailed rules which determine what costs you can and can’t deduct from your income. 

Regulations and rates can vary from city to city, however, if your income is less than a particular amount, you don’t have to report it to HMRC (Her Majesty’s Revenue and Customs-the tax authority of the U.K. government), and you are exempt from paying taxes. There are also some various reliefs for vacation rental owners that can exclude them from taxpayers.

Rent-a-room Relief

If you rent out a room in your main and only home and your gross rent for a year is less than the basic rate threshold- even if you offer services such as serving breakfast or laundry- you don’t need to report your rental income and pay any taxes.

Micro-entrepreneurs Relief

As the first £1000 rent you receive is considered tax-free rental income, you are exempt from tax payment and reporting your income to HMRC in case it is below £1,000 Micro-Entrepreneurs Allowance and you rent out your main and only home.

The 70-day Rule 

A property is accounted as the UK furnished holiday letting, should it be available for rent to the public for 140 days and at least rented for 70 of those days for the commercial rate rent and not occupied by the same person for 31 days in seven months.

One of your primary responsibilities as a vacation rental owner is to carefully document the rental periods, personal use days, and the time your property is under repairs and maintenance, and keep a meticulous record of your income and expenses by saving every single receipt. Besides, as vacation rental tax rules can vary by region, state, and city and change from time to time, it is on you to familiarise yourself with local vacation rental tax rules and the deductions and keep yourself updated to stay on top of your tax necessities, reduce your taxable income and save more money.

You can also avoid spending a lot of time calculating your taxes and free up some time to focus on other fields of your business by getting professional help from a property management company, tax specialist or an accountant with property taxation experience. This will add up accounting fees to your expenses; however, your accountant knows the vacation rental taxes and any other sort of tax imposed on a vacation rental such as lodging or occupancy taxes, self-employment taxes and VAT backwards. He/she also knows what you can claim and which receipts you need to keep; thus, you can rest assured that you won’t make any expensive mistakes.

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The Vacation Rental Taxes Fundamentals You Need to Know

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