Short-term rental demand has skyrocketed in recent years. In 2023, the short-term rental market in the US reached $64 billion, according to AirDNA. Are you one of the 785,000 hosts who managed over 2.4 million listings? Did you know short-term rentals come with special considerations for bookkeeping?
Not to worry—the REI Hub team is here to help you get (and keep!) your books on track.
We’ve compiled a list of the top accounting errors related to short-term rentals so you can avoid trouble come tax time.
1. Commingled Accounts
Commingled bank accounts are one of the top five errors we see in rental property account books. This error has multiple forms:
- Using your personal bank account for both business and personal transactions
- Combining accounts for multiple legal entities
- Running operating funds and security deposits through the same bank account
These may seem like easy, harmless options for your short-term rental property—but they will backfire quickly. When accounts are commingled, tracking transactions and separating your costs are more difficult, making it harder for you to capture your deductible expenses. That affects your bottom line and costs you time.
Running transactions from multiple legal entities through the same account also puts your liability protection at risk, even if you set up LLCs for your properties. Plus, combining security deposits and operating funds may violate state laws. Some states require rental property owners to keep deposits in separate accounts and return the accrued interest on those deposits to the tenants when their leases are up.
Bottom line: Keep a separate set of books for each legal entity. If you have commingled accounts, ask your tax adviser and lawyer what the requirements are for your area and discuss the best way to divide your accounts.
2. Unclear or Missing Records
Disorganized, inaccurate, and missing records can cost you time, money, and peace of mind. Without complete financial statements, it’s difficult to make informed decisions or find investors for your company. And misplaced or erroneous information may lead to penalties for filing incorrect or late tax returns.
You need complete, clear, and accurate account books for a short-term rental. Make sure your books can answer these questions:
- How much did you charge each of your renters?
- What exactly did you charge them for?
- How much tax did the tenants pay?
- How much tax did you pay?
- Are all your expenditures accounted for?
- Do you have receipts and logs to support your figures?
A clear filing and bookkeeping system like REI Hub will help keep your short-term rental business on track. Not sure which records you need to keep? Check out our article on information rental property owners need for their taxes.
3. Skipping Lodging Taxes
Filing your federal and state income taxes each year isn’t the same as filing your lodging tax. Lodging taxes are assessed on the cost of the stay, a per-night basis, or a per-person basis. The name of the tax may change depending on your location, so check for any of these requirements in your area:
- Hotel tax
- Occupancy tax
- Room tax
- Sales tax
- Stay tax
- Tourist tax
Plus, your property may be subject to more than one jurisdiction. You may need to collect lodging taxes for both the city and state.
And if you use listing services like Vrbo or Airbnb, confirm that they are collecting the correct lodging taxes on your behalf. Some jurisdictions require hosting sites to collect and remit lodging taxes on your behalf—but that happens automatically only in certain jurisdictions. You can add taxes to your listing sometimes, but you may need to collect and remit taxes for other authorities manually.
4. Charging the Wrong Tax Rate
The tax rate property owners should charge renters is the total of all local lodging tax rates that apply to the property. Remember, your investment property can be part of multiple jurisdictions: city, county, state, and special jurisdictions are all possible for the same rental unit.
For example, a short-term rental unit in Richmond, Virginia, has an 8% lodging tax. Lodging is also subject to sales tax in Virginia, so we’d also have a 1% city sales tax and a 4.3% state sales tax. The total tax to collect in this case is 13.3%.
Pro Tip: Double-check which taxes apply to your property by using the street address, not just the ZIP code.
5. Missing Deductions
Every rental property has administrative and upkeep outlays, but short-term rentals have a few expenditures that property owners may overlook. Costs that are incorrectly recorded—or disregarded completely—can end up costing you when you file your taxes. Check your account books to make sure you’re recording and deducting these expenses:
- Service fees: Sites like Airbnb charge hosts a service fee. Vrbo and Booking.com call them guest service fees. These types of fees are deductible for hosts.
- Software used for business: Think about the software you’ve used to edit pictures, schedule social media posts, keep track of your books, or manage your short-term rentals. Those expenditures are deductible if you’ve purchased or subscribed to software for your business. Just make sure you can prove it’s a necessary cost for work.
- Travel costs: Do you have to travel to your rental unit to perform maintenance? Make it a tax-deductible work trip. Plan your trip in advance and keep track of what repairs you handle while you’re there.
Are you worried about missing other deductions for your investment properties? Use our Tax Time Double-Check to find easily missed deductions before you file.
6. Depreciating at the Wrong Rate
Depreciation is a key deduction for rental property owners. And since tenants stay at your short-term rental, you may think of the property—and depreciate it—as a residential building. However, the IRS disagrees.
Residential real estate depreciates over 27.5 years. Nonresidential properties depreciate over 39 years. That makes a big difference for your account books, because you’ll have a smaller depreciation deduction over a longer period.
So, how do you know which depreciation rate applies to your units?
Look at the average length of your rental periods. If it’s 30 days or fewer, the property counts as transient. You’ll use the commercial property depreciation rate of 39 years.
For the rental to count as a residential rental property and qualify for the 27.5-year depreciation schedule, it must meet two conditions. First, 80% of the gross rental income must come from leasing the unit. Second, the average lease is for longer than 30 days.
Another depreciation error property owners make is not separating the land from the building’s value. The IRS doesn’t count land as depreciable; it only counts buildings and fixed assets. For more information on calculating the basis for your rental’s land and buildings, refer to our related article on journal entries for closing statements.
7. Procrastinating on Your Books
Putting off or skipping your updates, reviews, reports, and reconciliations might not seem like a big deal. But, procrastinating on bookkeeping tasks can lead to missed transactions, lost documentation, or missed filing deadlines. Those can end up costing you through overlooked deductions, late fees, higher interest rates, or penalties. Plus, you can’t gauge your business’s health or make informed decisions without current books.
No matter who handles your accounting, be it you or a bookkeeper, up-to-date and accurate books are a must for your rental property business. Use REI Hub’s accounting workflow to help you get into a routine for your bookkeeping and account reviews.
Don’t have enough time to dedicate to your books? That’s one of the eight signs that you may need a bookkeeper. Outsourcing or delegating your bookkeeping is an option. Remember, the goal is to have clear, accurate, complete account books.
Takeaways
Whether you’re a seasoned short-term rental pro or new to vacation rentals, reviewing your books and accounting processes is always a smart idea. If you struggle with bookkeeping errors for your short-term rental property, we can help!
A comprehensive bookkeeping system like REI Hub allows you to automatically import your transactions, set up matching rules for recurring transactions, attach receipts, store important documents, and more. We designed our software specifically for rental property owners like you, making accurate and up-to-date bookkeeping easier and faster than ever.
Sign up for a free trial today!
