Real estate tax rules can vary greatly depending on the type of property and form of ownership, such as an LLC versus an individual name.
To determine the tax difference between a rental property, vacation home, or an investment property, the IRS considers how often it’s used and for what purpose. In other words, the number of days you personally use the property versus the number of days it’s rented out will determine how you will be taxed. From a tax perspective, investment properties are treated differently than primary residences and second homes. Instead of deducting interest and real estate taxes, costs associated with the property are expensed, or subtracted, from gross rental revenue received, along with the ability to depreciate the asset.
Below are some key documents to gather when preparing your 2020 tax return:
Rental Properties
For investment properties, the following is a list of some of the documents needed to prepare your tax returns:
- Documentation on the revenue you received
- Form 1098 to document interest paid
- Your real estate tax bill per calendar year
- Your homeowners insurance premium paid
- Renovation costs
- Management fees
- Legal and Professional services
- Repairs
- HOA fees
- Advertising
- Realtor fees
- Speak with your tax preparer on what supporting documentation is needed to verify the expenses paid.
Airbnb, VRBO, and Other Rental Platforms
This income is not earned tax-free! Whether it’s one room or an entire house, if you rent a space out for more than 14 days in a year, all the above will apply. This includes the money you receive for renting out your property, as well as any extras you may tack on, such as cleaning and maintenance fees.
The amount you should report on your taxes is the gross income you’ve earned from your rentals.
While you are responsible for keeping track of your rental records and business expenses, Airbnb will provide a 1099 for users that make over $20,000 and have over 200 transactions annually. If you use a rental service outside of Airbnb, such as VRBO, check their website for details on what they will provide.
As always, reach out to your accountant or tax professional with any questions regarding your individual tax return.