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Proceed cautiously when collecting short-term rental income

It wasn't all that long ago that people looking to earn a supplemental income would simply search the want ads until they found a few promising leads for part-time work. While many still rely on this time-tested method, still others are harnessing the power of technology to help them make ends meet, taking part in ridesharing programs, picking up web-based employment and, most recently, utilizing online rental hubs.

For those unfamiliar with the concept of an online rental hub, it essentially allows a person to rent out their home, apartment or even just a room for a short period of time via an online service that carefully screens both prospective hosts and guests, and ensures prompt payment in exchange for a fee.

As appealing and relatively simple as it can be to make money through a trusted platform like Airbnb or VRBO, experts indicate that people nevertheless need to keep certain tax realities in mind so as not to run afoul of the Internal Revenue Service.    

The single biggest factor that experts indicate would-be hosts should keep in mind is to limit the number of days they rent their property to 14 per year. That's because if you don't exceed this number, any rental income earned is entirely free of federal income tax and doesn't have to be reported to the IRS.  

This rather generous -- and rare -- tax exemption is referred to by many as the "Masters rule," a moniker that stems from its frequent use by those who live in the Augusta, Georgia area and rent their homes during one of professional golf's most popular tournaments.

While it's tempting to think that the Masters rule would only benefit those living in major urban hubs, where there are always major events spanning several days, this isn't the case. Indeed, the rental period of 14 days or less doesn't have to be consecutive in order to take advantage of the exemption.  

Some important points to keep in mind about the Masters rule include:

  • If you exceed the 14-day limit by even one day, the entirety of your rental income must be reported to the IRS and will be subjected to federal taxation, no exceptions.
  • If you take advantage of the Masters rule and remain under the 14-day limit, you still cannot deduct direct costs.
  • If you take advantage of the Masters rule and remain under the 14-day limit, you may still be subject to local and state taxes

In the event you encounter some sort of difficulty with the IRS over rental income or any other type of income, with the agency claiming you owe a substantial amount of back taxes, consider speaking with an experienced legal professional as soon as possible to learn more about your rights and your options.

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