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Financial Planning > Tax Planning

Renting Your Home on Airbnb? Don't Forget Lodging Tax

By Danielle Andrus

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Are your clients paying all the taxes they’re responsible for? If they’re renting out their home via a site like Airbnb, maybe not.

“Vacation rentals have become a very popular segment in the travel industry and are growing very rapidly, Rob Stephens, co-founder and general manager of HotSpot Tax, told ThinkAdvisor on Wednesday. “You’ve got a lot of people all over the U.S. who can put their property on one of these websites and connect to a global travel audience.”

A lot of those people are renting their property on their own through Web services like Airbnb or VRBO. It may not even occur to them, but “when you’re short-term renting a property anywhere in the U.S., you’re essentially operating as a hotel, and you have to collect the same tax a hotel would,” Stephens said.

Guests pay the lodging tax, but landlords have to collect and remit them to the appropriate authority, Stephens said.

HotSpot Tax was recently acquired by Avalara, and is transitioning to a new name, Avalara MyLodgeTax.

HotSpot Tax automates tax collection for short-term landlords. “Most of our customers have to pay a state tax plus a city tax, or a state tax plus a county tax, so there’s multiple levels of taxation and multiple tax agencies involved,” Stephens said. “For the layperson who in their mind is just renting their home, it’s not typically in their sphere of awareness.”

HotSpot Tax will register for and obtain any licenses or tax accounts the user needs depending on the state their property is in, then remit the taxes quarterly or monthly as due.

“When a customer reports their figures to us it generates an electronic bank debit. It takes them probably 30 seconds each month to report their rent to us, then based on their information, we file and pay the taxes wherever they’re due. We electronically debit whatever tax is due, plus our fees, from their bank account.”

The company also handles correspondence and delinquencies with the approprtiate tax authority, Stephens said. “Some of these licenses require annual renewal. The way we developed our model and what we represent to our customers, we guarantee you’re fully compliant.”

He added, “If you’re on Airbnb or VRBO, all you have to do is sign up for our service. We’ll tell you what taxes you need to collect; you collect them on each booking; and we’re going to file and pay all that each month, each quarter and guarantee it’s correct. Our service is around $12 a month, depending on where you’re located.”

Stephens said his firm is effectively an accountant for its customers. “We’re really no different. We’re their representative. We’re signing their forms. We’re filing their returns, paying their tax, doing everything a full-service accountant would do, except we’ve automated it all.”

Income tax does come into play, Stephens said, but because there’s no federal sales tax, most short-term landlords won’t have to interact with the IRS. “If you’re generating rental income, then obviously that needs to be reported,” he said. However, Stephens stressed that “very few of these properties across the U.S. have what would be taxable income or a tax liability.”

“People are just trying to defray the cost of ownership,” he said. “They made a significant investment and they’re renting their property just to cover the mortgage or some of the mortgage.”

For example, Denver residents who rent their home have to collect a combined 14.85% for city and state lodging taxes on overnight stays. Before you can even collect that tax, though, “you have to register with the Colorado Department of Revenue and get a sales tax license. Then you have to register with the city of Denver” for a lodger’s tax license, Stephens said. Taxes are remitted quarterly, with a portion going to the state and a portion going to the city on a separate return.

“That’s a very typical example of what somebody has to do: a couple of different agencies involved, a tax somewhere between 10% and 15%, and a couple of different filings to different agencies each month or each quarter,” Stephens said.

Lodging tax is only for short-term rentals, although what constitutes a short-term rental might vary from state to state, according to Stephens. Less than 30 days is “pretty typical across the United States” to be considered a short-term rental, but in some areas, like Florida or Hawaii, which have a large tourism industry, it could be as high as six months.

Some states have exempted vacation rentals from the tax entirely, while others impose it only on properties of a certain size, such as at least six units or at least three rooms, Stephens said. Massachusetts, New Jersey, Connecticut and Rhode Island effectively don’t tax short-term rentals on single-family homes, Stephens said, although definitions vary. He added that in Massachusetts and Rhode Island, legislation has been introduced that might change that.

Even if there is taxable income after deducting all their expenses, lodging taxes can quickly add up for short-term landlords. “These lodging taxes in the 10%-15% range — if you’re doing $30,000 in rent a year, that’s $3,000, $4,000, sometimes $5,000 in tax due.”

And if they don’t collect and pay those taxes? “That’s where theoretically it can get really ugly,” Stephens said. Say your client is renting a vacation home at $20,000 a year with 12% tax. “That’s $3,000 in tax. Let’s say they’ve been doing this for two or three years and not paying. All of a sudden that’s $6,000 to $9,000 liability just on the tax.”

Add to that the penalties and interest, which accrues every year, “if you’re talking about two or three years, that can easily be another 50% of the tax.”

However, he reiterated that guests pay the tax, so “if you’re renting your house, you have no incentive not to collect the tax.”

— Check out The Beach Condo Rental Tax Write-Off? Not So Fast on ThinkAdvisor.

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