Our recent blog addressed many of the tax issues inherent in renting your vacation home on Airbnb, VRBO, or another platform. Which form to file (Schedule C or Schedule E) with your tax return is a classic area of confusion for owners of short-term rentals, and the answer is often unclear for Airbnb hosts and other property owners navigating their first tax season with a vacation rental. It’s important to work with a tax professional who understands all the nuances of the law in this area to ensure you’re filing the right forms and also maintaining the required records.
First, here’s a brief explanation of the differences between the two forms.
In general, when you are self-employed and actively work in your business, you report the income and deduct allowed expenses on Schedule C. You can think of it as income that you have to do something to earn. Income reported on Schedule C is subject to self-employment tax.
Typically, Schedule E is used to report passive income, including income from rental real estate. You do not deduct business expenses on Schedule E, as they are not considered allowable deductions. You are also subject to Passive Activity Loss Rules, which limit the amount of passive income that can be offset by losses.
If you’re thinking that your vacation rental requires a lot of “active” work for you to manage listings, find guests, and maintain the property, it may seem like Schedule C is the obvious choice. However, the IRS has a lot of specific rules for reporting short-term rental income and losses that don’t necessarily align to that simplified Schedule C vs. Schedule E explanation above. You’re also probably thinking that you will want to be able to deduct your expenses to offset your income (which will require filing Schedule C). But again, there are many nuances and it’s even possible that your rental income can be considered non-taxable.
Schedule C Requirements for Airbnb and VRBO Hosts
Generally, you will file Schedule C for your short-term vacation rental if:
- The average guest rents the property for fewer than 7 days, or
- The average guest stay is fewer than 30 days AND you provide guests with “substantial services”
Schedule E Requirements for Airbnb and VRBO Hosts
Generally, you will file Schedule E for your short-term vacation rental if:
- The average guest rents the property for more than 7 days and you don’t provide “substantial services”, or
- The average guest stay is longer than 30 days
What are substantial services in short-term rentals?
Substantial services are part of the way the IRS determines whether your management of the property was passive or active. Substantial services include things like housekeeping while the unit is occupied, meals and entertainment, concierge services, linen service, etc. If guests provide their own linens and you only clean the unit between guests, you are considered a passive owner for tax purposes. Further, maintenance on the property is not considered a substantial service, nor does it qualify you as actively working in the business (even if you’re doing the maintenance yourself).
Is vacation rental income always taxed?
If you personally used the rental property and only rented it occasionally, you may not need to file Schedule C or Schedule E, meaning you won’t owe tax on the rental income at all. However, the threshold is fairly low—you must have rented the property at fair market value for 14 days or fewer during the year. A common example here is the Airbnb host who only occasionally rents a room in his primary residence.
Airbnb, VRBO, and other online vacation rental platforms will now be required to provide a 1099 to individuals/businesses who have rented a home and made $600 or more in one calendar year.
What’s the best tax designation for a vacation rental?
Like most questions about tax, the answer depends on your overall tax situation. If you plan your tax strategy prior to listing your rental, there are some steps you can take that will enable you to use the tax schedule most beneficial to you. We strongly recommend consulting with a tax professional who can look at the big picture of your taxes and help you take proactive steps to be eligible for advantageous tax treatment of your short-term rental. Contact us today to schedule your consultation.
Don’t forget, many rental property business expenses are fully deductible. We have put together a comprehensive guide of the top small business tax deductions that will leave you feeling relieved this tax season. In this guide you will find small business tax tips, detailed examples, and strategies to tracking expenses, giving you a better understanding of how to take advantage of these tax savings. Complete the form to receive a free download of: Small Business Tax Deductions – Your guide to understanding the overall impact of business expenses.