Investing in vacation rental properties through online marketplaces like Airbnb or VRBO can yield lucrative profits. If you’re considering renting your home in California as a vacation rental, familiarize yourself with the county-specific regulations on investment properties, understand the new occupancy taxes, and learn how to maximize deductions for your rental property.

In this article, we’ll explore helpful insights on how to take advantage of short-term rental tax deductions and profits, as well as understanding eligibility.

What’s considered a short-term rental?

In California, any period of less than 30 consecutive days is considered a short-term rental. Coordinating a short-term rental property through online homestays like Airbnb is standard practice.

Every county ordinance may vary, and each region may enforce rules using precise protocols. 

For instance, in San Diego, rental property owners who plan to rent their homes for short stays (less than one month) must obtain a Transient Occupancy Tax Certificate. In addition to charging occupants a rental fee, you must charge a Transient Occupancy Tax (TOT), which goes to the government.

Los Angeles requires your STR to be your primary residence.

When should I report rental income on my short-term rentals? 

All rental income must be reported when you submit your annual state tax return. The due date to file tax returns and pay balances is Monday, April 15, 2024. California allows an automatic extension until October 15, 2024, to file returns on taxable income; however, you must pay your balance by April 15, 2024. Real estate rentals can generally use Form 1040. 

Do I always need to report rental income on my vacation rentals? 

Whenever you earn money from renting your home, rooms, or guest house, you typically have to pay taxes on that income. However, you can take steps to minimize the amount of taxes you’re required to pay.

According to TurboTax, under the 14-day rule, you’re not obligated to report rental income on a STR as long as you rent the property for no more than 14 days annually. On the other hand, if you use the STR for personal use for more than 14 days per year, the IRS limits what you can deduct from transient occupancy taxes. 

If you’re renting to make a profit and don’t use the home or unit as a residence, your deductible rental expenses will likely be more than your rental income.

How do I report rental income for my short-term rentals?

It’s important to correctly handle rental income expenses for tax purposes and understand what paperwork you must file with the IRS. Use Schedule E (Form 1040) to report rental income on all your properties. To help get started, follow these three steps.

Step 1: Gather the proper forms

Gathering the correct forms for filing Form 1040 taxes is essential because it ensures you submit accurate rental income and expense reporting to the IRS. With Form 1040, you can report income and losses from your rental real estate. You can complete as many Schedule E forms as needed if you have several rental properties.

Here’s a detailed guide on how to file a Schedule E. 

Good bookkeeping throughout the rental process will help keep you organized and streamline the process when it’s time to do your taxes. Here is a record of items you should have that will come in handy when filing: 

• Comprehensive financial statements
• Some travel expenses to coordinate repairs
• Source of receipts with dates
• Documents supporting expenses
• Detailed deductible expenses
• Business expenses related to the STR

You can use this template to help track your rental expenses. 

Step 2: Determine if the structure of your business is active or passive

Rentals facilitated through Airbnb can be a good idea for many reasons, but one of the most beneficial is the tax deductions you can get. The IRS views Airbnb as a business and not solely a rental property, mainly because the rental period is usually seven days or less. 

The difference between active and passive businesses is that active income is earned through your job, and passive income is earned through an investment. So, if you spend at least 100 hours yearly on the STR, you can deduct losses from your rental business. Losses can include repairs, cleaning, advertising, and maintenance. 

A passive income is earned through an investment when you engage in minimal work. Filing a 1040 can help you capitalize on losses if you are actively managing your rentals.

Step 3: Reporting rental income with a Schedule E (Form 1040)

Consulting with an accountant specializing in property taxes and taxable income can help guide you through the intricacies of reporting your rental income while ensuring you are complying with your state’s tax laws. Now that you have your forms and paperwork organized and completed, you’re ready to submit.

Key tax deductions for short-term rentals

A new law in California, the Labor Force Housing Financing Act of 2023, will add a 15% tax to STRs, like Airbnb, and go into effect on January 1, 2025.

Some key tax deductions for STR in California include maintenance, repairs, property management costs, cleaning, insurance premiums, and depreciation.

In California, property taxes are tax-deductible. Deductible maintenance, repairs, and operating expenses include fixing the plumbing, repainting walls, and making the home more habitable and safe. 

FAQ: Understanding California taxes on short-term rentals