House near river image via Shutterstock.
Now is the time of year when many people rent out their vacation homes. If you rent out your vacation home (or main home) for 14 days or less during the year, the rental income you receive is income tax-free. However, this doesn’t mean no taxes are ever involved when you rent out your vacation home. Most states require people who rent out their vacation homes on a short-term basis to charge and collect sales and lodging taxes on the income they earn.
What is a “short-term rental”?
Sales and/or lodging taxes are due only on income earned from “short-term rentals.” Thus, for example, a landlord who rents out a home on an annual basis need not pay them. 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 Internal Revenue Service. 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, not the person who provides them. 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 percent tax of the total rent charged. For example, if you rent out your vacation home for two weeks and earn $2,000 in total revenue and your sales tax rate is 10 percent, 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 have 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 property is located to determine your sales and lodging tax requirements.
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.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including “Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants,” “Deduct It,” “Working as an Independent Contractor” and “Working with Independent Contractors.