The internet is a cornucopia of wealth-creating opportunities. In addition to the major market players like Google and Amazon, plenty of people make good money selling products and services over the internet. In recent years, people have used sites like Airbnb to make some extra money renting their home, an empty floor, or even a spare bedroom to a tenant over the internet.
The Twin Cities’ short-term rental market is particularly robust when large sporting events are in town. Witness reported incomes of $50,000 per week for the Ryder Cup. Pay attention to the tax consequences if you are considering renting out property for the Super Bowl in 2018 or the NCAA Final Four in 2019. These events, and the short-term rental market in general, can generate solid income for many households. Income, however, is subject to tax.
The taxation of short-term rental income varies wildly depending on the circumstance. Take into account these five points if you are considering renting your home.
- If you live in the unit you are renting, income from the activity can either be completely excluded from tax or it can all be subject to tax with very limited deductions.
- The tax rates on which income is taxed can vary greatly.
- Rental income is typically subject to tax at ordinary rates but, in certain circumstances, the income can also be subject to self-employment taxes (15.3%) on top of the income tax rates.
- At the state and local level, some short term rentals are required to collect and remit sales taxes and hotel occupancy taxes.
- The ability to recognize losses on the activity could be forfeited and the income subject to an extra 3.8% surtax for taxpayers in higher tax brackets.
As you can see, there are a lot of tax considerations when engaging in a short-term rental activity. It is best to consult your tax advisor so you know the consequences arising out of your particular circumstances.
Tristen J. Cohen
Senior Associate, Tax Department