Although short-term rentals have been around for some time, we’re hearing about them now more than ever thanks to sites such as Airbnb and VRBO that let people list their homes for rent for periods ranging from one day to several months.
With all this influx to the market, there’s been some discussion about what a short-term rental exactly is.
This is important because how you define your property can determine a number of things, such as how much you pay in taxes, and if you do have a short-term rental, you may be able to take advantage of some important benefits.
While the exact definition will vary by location, a short-term rental is generally considered to be a property that is rented out for less than one month at a time.
However, most short-term rentals deal with rentals for as little as a day or two to a week.
In some places, a property is considered a short-term rental if the rental period is six months or less. But multi-month leases are more often considered long-term. If you rent month-to-month or for multiple months at a time, be sure to check local regulations to see how they would classify your property.
No matter how long your rental period is, your property is only considered a short-term rental if you rent it out for 15 days or more in a year, at least as far as the tax authorities are concerned.
So, while there might be some variation, if you are renting your property out to multiple people for more than two weeks out of the year, it likely qualifies as a short-term rental.
In addition to being rentals for periods of 30 days or more, there are a few other things that distinguish long-term rentals from short-term.
Long-term rentals usually involve a lease agreement, signed by both the property owner and the tenant. With short-term rentals, this is not necessary
In long-term rentals, the responsibilities are also different.
For example, property owners are not responsible for furnishing the place, as they would be in a short-term rental, and tenants have to take part in the upkeep of the property. They are also responsible for paying utilities, something that is not the case when you rent out your property short-term.
These features of a long-term rental are what make it a “passive” activity, something that matters for your taxes.
If you are renting short-term, you may have come across this term, which seems to contradict the idea that short-term rentals don’t come with leases.
In most cases, they don’t. But these agreements can be signed if someone is planning to stay for multiple months at a time but less than six months total.
Some property owners ask for this to clarify the nature of the agreement and also reduce their responsibilities. But if you’re renting out for less than a month, it’s extremely uncommon to ask for a contract.
If you do use short-term leases, whether or not your property qualifies as a short-term rental will still depend on the way your local town or city defines it. If the rental periods are more than 30 days but less than six months, you may qualify as a long-term rental property.
Determining if your property is a short- or long-term rental is not just an exercise in classification. Instead, it will determine many of the steps you have to take to manage this part of your investment portfolio.
Staying in compliance is important and will save you money you in the long run, so keep the following in mind when you’re deciding how to name your property:
Many places, particularly cities, require short-term rental property owners to file for a license or permit, much like they would have to if they were operating as a hotel. This usually means paying a fee, perhaps just once or possibly multiple times per year; it depends on the city.
The reason for this has to do with the impact short-term rentals can have on the long-term market. Studies have found that an increase in the number of short-term listings leads to an increase in rent prices in that city.
As a property owner, this just means more income potential. But if a city is worried about this potential consequence, they may put up some red tape around short-term rentals. You will need to navigate this to make the overall experience and investment less costly and more worthwhile.
Another reason why it’s important to properly classify your property is because it will determine how you will pay your taxes.
Short-term rental income is considered active, which means you have to work for it. Therefore, it is treated more like business income. You can deduct the expenses you incur making this income and just pay taxes on the profit.
If you have a long-term rental, you still pay taxes on the income. You just can’t deduct any expenses outside of some basic ones related to property maintenance.
What this means is that if you are renting out on a short-term basis, save your receipts. Cleaning services, new supplies, repairs, maintenance, etc. can all be considered business expenses. Keeping track of them and declaring them on your income tax return can save you lots of money down the road.
Short-term rentals can be lucrative if you market well and pay attention to your guests. But they can also be difficult to manage.
If you are listing your property on Airbnb, VRBO, or something similar, use Uplisting to put everything in one place and simplify the entire operation. Treat your rental like the business that it is and make it work for your financial future.
We’ve built an all-in-one property, channel management and automation tool to help property managers scale seamlessly.
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