Table Of Contents
Have questions about short term rentals? Our team of real estate accounting professionals has answers. Read on or jump to your big question to get insight. Want ongoing support to grow your short term rentals business? We offer subscriptions to the renowned Tax Smart Investor™ program, as well as advisory services for real estate investors.
How do I start a short term rental?
You probably had your interest piqued by reading an article, hearing from a friend, or otherwise getting exposed to the profit potential inherent in short term rentals. But where to begin? Short term rentals should begin with a discovery process: do market research in the areas of the country you’d want to buy a short term rental in. Check the laws, check the rental rates, check the success of other STRs in that area.
While you are researching that, you can begin building relationships with the key players that will support your launch into STRs: a real estate accountant, a lawyer, and a lender. You’ll want to begin the process of financing once you find the property you want to buy, and also work on developing the systems you’ll need to renovate, furnish, clean, and market the property. Once you’ve bought your short term rental, you’ll probably list it on Airbnb, VRBO, or a similar platform and start the cycle of renting, cleaning, marketing, and ongoing upkeep.
Want a far more thorough treatment of how to start a short term rental? Read our Guide to Short Term Rentals.
How profitable are short term rentals?
There are several factors that impact the profitability of short term rentals. These include the type of property you have and where it is located. Rental rates may also fluctuate seasonally, which will impact how you calculate your profits.
It’s worth noting that, as a general rule, STRs tend to be more profitable than long term rentals. After all, the daily rates you can charge will be higher than a year long lease.
How do I succeed with a short term rental?
For every real estate investor that tries with short term rentals, there are a few who fail. If you rally want to succeed, you have to be organized from day one:
- Do your market research before you even buy
- Enlist a team of professionals to advise you
- Create a business plan for owning and operating a short term rental
- Consider the real numbers and nail down a budget
- Stay dedicated to this for the long-run
Many people think short term rentals are just a quick financial win. While they can be, the savvier investors will see this as a long-term investment that yields long-term returns.
What is the difference between short term rental and vacation rental?
From a tax perspective, short term rentals and vacation rentals are the same thing. If you want to take advantage of the short term rental tax loophole, you simply have to meet one of two criteria: an average stay of seven days or less, or a 30 day or less stay with substantial services. In the eyes of the IRS, you’ll need to meet the same standards and qualify for the same deductions.
Is Airbnb the same as short term rental?
The types of listings you see on Airbnb are often short term rentals. In fact, this platform has become known for facilitating short term rentals, providing a widely accessible listing opportunity, the ability to get and give feedback, and some features that offer pricing or operational support. While there are long term rentals on Airbnb, short term is the more common listing type.
How do you calculate short term rental income?
The goal of having a short term rental is to make money. One of the first things you should do is hire a real estate accountant and get a bookkeeper on board. This is because there are important guidelines to meet as you run your short term rental business.
Essentially, you calculate short term rental income the same way you would any other type of business income.
You will take your net, which is the total amount of rental income you receive, minus expenses, including property management fees, advertising fees, upkeep/utilities, mortgage interest, repairs and maintenance, supplies, legal and accounting fees, insurance, cleaning company, platform listing fees or memberships/subscriptions, depreciation, other associated expenses, to get your gross income.
The goal of doing short term rental bookkeeping correctly is, yes, to stay in line with the IRS and ensure you understand the financial health of your business, but also to take advantage of the STR tax loophole. When done right, you can make your losses from a STR non-passive. Read more about that here.
How do you account for short term rental income?
This is a question we have to answer relative to your situation, which will be impacted by how you structure your short term rental. If you rent your STR for seven days or less, you may meet the STR tax loophole, making your income non-passive as long as you materially participate. This will be reported on Schedule E.
If your short term rental is rented for 30 days or less plus you provide substantial services, you will have to file as a business, reporting on Schedule C.
How do you manage finances for a rental property?
Whether you have a single property or many properties, there are financial tasks to be performed to maintain your short term rental business. The overwhelming recommendation from real estate accounting professionals is that you use software, such as Quickbooks, to organize all transactions related to your STR business. You can have a bookkeeper help you perform these regular tasks. You will also want a real estate accountant to review entries and books on a regular basis, and assist you with preparing taxes.
How do I manage my rental property bookkeeping?
If you don’t have any background in bookkeeping or accounting, you have two options to manage finances and records for your short term rental: 1) take a course or 2) hire an accountant and bookkeeper. Most people go with the latter, because it gives you growth potential to expand your STR business.
How do I set up short term rentals in Quickbooks?
Quickbooks is by far the most popular accounting software on the market. You can use Quickbooks to keep the books for your short term rental.
Here’s what you need to do:
- Open QB account
- Import chart of accounts
- Link bank accounts and credit cards
- Set up rules - automations, repeat transactions, categorizations
- Do monthly reconciliations
- Generate monthly profit and loss statements and other documentation
Doing Quickbooks right keeps your business “tax ready,” and also keeps you in the know about money going out and money coming in. There are ways to make QB even more advanced, using automatic categorizations, paying recurring expenses, using class tracking for multiple properties, and more.
This is one of the first things STR owners outsource. For more insight into what short term rental accounting services could entail, click or tap here.
Does Quickbooks work with Airbnb?
You can export data from Airbnb and import it into Quickbooks manually. If you want to automate this, there are currently a handful of third party integration tools that can connect Airbnb with Quickbooks, the best known of which is bnbtally.
How do you do bookkeeping on Airbnb?
Is Airbnb cash or accrual?
This is a question related to the type of accounting you perform for a short term rental you have listed on Airbnb. Generally, short term rentals will be cash basis accounting, meaning you report the income in the year you receive the income, and you report expenses in the year you pay for expenses.
Does Quickbooks work with VRBO?
Bnbtally integrates Quickbooks with VRBO, and there are a handful of third party tools or custom API options to make this integration automatic. However, even if you do set that up, you will have to reconcile accounts and run everything through your bank account. VRBO will deposit money into your bank account, which will feed into QB. An accountant can ensure your setup is on point to track all relevant transactions and data.
How do you depreciate a short term rental property?
Depreciation will be part of your monthly and yearly financial tracking. Commercial properties generally depreciate over 39 years. However, a skilled real estate accountant can perform something called a cost segregation study. In this review, they may find that your property has certain components that can be broken out into five year (tangible, personal property) or 15 year (land improvements or even qualified improvement property). This would reduce your tax liability and could help with cash flow.
Want to find an accountant to perform a cost segregation study for STR depreciation? Get in touch with us today.
Is short term rental income passive?
Passive income refers to what you earn from a rental property (or other real estate investment) where you are not actively involved. This “unearned income” is subject to taxes. A goal of short term rentals is to make the income non-passive, which means it is not subject to self-employment taxes. There are a few strategies to use to do that, which you can learn more about here.
Are short term rentals scheduled C or E?
It depends. Short term rentals where you provide substantial services and rent for an average of 30 days or less will be reported on Schedule C, and subject to self-employment taxes. However, if you maintain an average stay of seven days or less, you don’t have to provide substantial services and may report on Schedule E, where you will generally not be subject to self-employment taxes.
Curious about how short term rentals can provide tax benefits to W-2 employees? Check out this video to learn more.
Are STRs subject to self employment taxes?
If you provide substantial services for your short term rental, generally you would report on Schedule C and be subject to self-employment taxes.
What is considered a short term rental by the IRS?
The IRS has some qualifying criteria for short term rentals. Essentially, it considers a property a short term rental if it has an average stay of seven days or less, or 30 days or less if substantial services are provided. There are minimal use requirements that govern whether you meet this delineation, and it’s important to fully understand how often you can stay, how often your family can stay, and how often it must be rented/for how long to ensure you are actually operating according to the law.
What is deductible on short term rental property?
Depending on how you are invested in and run your short term rental property, you may be able to deduct a number of expenses.
Here are some examples of allowable deductions for short term rentals:
- Mortgage interest
- Bank fees
- Legal fees
- Accounting fees
- Other interests
- Other expenses
To make sure you are doing it correctly, you will want to capture deductions in a bookkeeping system, such as QBO, and stay on top of these records by reconciling bank accounts and categorizing transactions once a month.
Pro tip — Avoid letting this stack up - the longer you go, the higher chance you’ll forget about it. Do it regularly to make sure you aren’t missing out on anything and always know the financial health of your business.
What are the tax issues for renting my home?
Renting your home isn’t the same as renting a short term rental property. If you rent a residence, the losses will be limited to your income.
A portion of your home’s expenses — mortgage interest, property taxes, utilities — will be allocated to your rental activity. For example, if you rent your house for 30 days of the year, you will divide 30 days by the total number of days you’ve lived there then multiply that ratio by the expenses.
A house is considered a residence if you live in it for the greater of 14 days or 10% of the days rented. If you want to use the property personally, you want to use it for less than 14 days or 10% of the days rented.
What do I need to know about taxes for my short term rental?
You have two options for short term rentals: an average day of seven days or less, or an average stay of 30 days or less while offering substantial services. If you use the latter, you are generally subject to self-employment taxes. If you are able to achieve a rental duration of seven days or less, you should be able to make your short term rental income non-passive, which offsets W-2 income. Your best bet is to speak with a CPA who specializes in real estate.
Note: If you’re using these strategies, make sure you’re documenting your position to ensure that if you’re ever pulled for an audit, you can defend your position.
Can I use my short term rental personally?
You can use your short term rental personally if you do so for less than 14 days or 10% of the days rented. If you use it for more than that, it’ll be considered a residence.
Who can use my short term rental?
Short term rental owners may envision a dual purpose: renting it for income part of the time, and letting friends and families use it for part of the time. This is a risk. If you want your short term rental income to be non passive and not subject to self-employment taxes, you must not use it for personal use for more than 14 days. And, here’s the clincher: if someone stays in your rental, and isn’t paying fair market value for rent, that will be considered personal use.
This includes your spouse, siblings, ancestors, lineal descendants, etc. You need to follow the letter of the law here. If people aren’t paying rent but staying in your short term rental, it will count against your days for stay, and could put you into the personal use category and make you accountable for taxes on all of your STR income.
How to find the laws for STRs in my state?
Different states, and even different counties and neighborhoods, have different rules for short term rentals. Because there has been increased activity in this sector in the last few years, those rules have changed. It’s important that you stay up to date on what the rules are, whether you are looking to buy a short term rental or already have one.
Short term rental software is pretty good about issuing updates on the legalities of STRs in your area. You can also Google, “short term rental laws in [city, state].” We do recommend getting down to the city level for this, as there are often guidelines that will impact your ability to provide a short term rental in that area.
Whatever information you do find online, make sure you cross check it with a lawyer and an accountant before you make any big decisions.
How to find the IRS rules for STRs
Go to the source: www.irs.gov has an easy search tool that will get you straight to short term rentals. There are also plenty of articles and additional information on that site that will give you original material (no interpretation) that you can talk over with your professional services team.
How to find STR software?
Most people who succeed in short term rentals these days use one of the widely available STR platforms to advertise their property.
The biggest ones are Airbnb, VRBO, Guesty, Lodgify, HomeToGo, Vacasa, FlipKey and Hostaway. There are always more hitting the market, but keep in mind what you need: maximal visibility to potential visitors.
In addition to listing apps, you may also want to look into pricing apps and property management apps to support the operational side of your short term rental business.
Get Accounting Support for Your Short Term Rental
Our firm specializes in accounting for real estate investors, including those who are in the short term rental game. There are plenty of benefits to be had from short term rentals, including major tax savings and a great source of income. To learn if your STR business is the right fit for our services, contact us today.