For property owners and savvy investors across the US, entering the short-term rental market continues to represent a desirable way to secure additional income. Recently published data reveals short-term rentals now account for 20% of the global rental market, indicating just how popular these types of rental agreements have become for tenants and property owners alike.
However, running a successful rental operation requires a lot of hard work and dedication. Aside from practical tasks like interior design and maintenance, property owners must consider factors like the average cost of property taxes by state, while also making efforts to market their listings to the right people at the right time. These tasks can be difficult without assistance.
This goes some way to explaining the popularity of services like Airbnb, with figures suggesting over 4 million property owners utilize this platform to simplify the process of both attracting and securing tenants. But things aren’t quite as easy as creating a listing and waiting for responses.
Like any other form of income, money earned via Airbnb hosting may be taxable, but the exact amounts will vary depending on several important factors. To help hosts make the most of their investments, this guide will explore a range of income and property tax insights for Airbnb property owners.
Passive Rental vs Active Business Income
The first factor to consider is whether the income related to your short-term rental activity will be classed as passive rental or active business income by the IRS. To work out which definition applies to your Airbnb property, you must consider whether substantial services are provided.
Substantial services typically include most maintenance and general upkeep tasks that you may associate with hotels and other similar rental agreements. The IRS defines these services as:
- Daily cleaning while the property is occupied by guests
- Providing entertainment and/or meals
- Changing bed linens/replacing towels
- Maid services
- Providing planned trips and tours
- Providing transportation services
If any of these services are provided to guests when renting your Airbnb property, your activity must be reported as business income. This will often result in more above-the-line deductions on your tax return in a year of net loss, with net income being subject to self employment tax.
Understanding the 14-day Rule
All Airbnb rental property owners should be aware of the 14-day rule, as this guidance can allow hosts to marginally reduce expected taxes. Under this rule, short-term rental property owners can receive tax-free income on a specific rental if the agreement meets the following criteria:
- The property is rented for no more than 14 days during the year
- The property is used personally for more than 14 days during the year
- The property is uses personally for more than 10% of the total days it’s rented to guests
If an Airbnb property in your portfolio meets these criteria, you will not be required to report the income to the IRS, though you also cannot deduct any related expenses as a rental expense.
Deductible Expenses from Rental Income
Before filing taxes relating to Airbnb rental income, property owners must make sure they’re making the most of deductible expenses. Look over your records and consider the following:
- Repair/maintenance costs
- Property taxes
- Mortgage rates
Some deductible expenses may differ depending on how the property is used, the services you provide and even your location, so make sure that you’re well-informed of variables like property taxes by state and your current insurance premiums. Keep records of all maintenance, cleaning, insurance and advertising fees, as each of these factors may be treated as business expenses.
Additionally, Airbnb property owners can often include a portion of utilities and service fees alongside other deductible expenses, and in some cases depreciation on the property may be factored into the equation, helping to reduce the overall amount hosts are required to pay in tax.
Pass-through Tax Deductions
Many short-term rental property owners, including Airbnb hosts, may qualify for a pass-through tax deduction. Provided your Airbnb rental qualifies as a business as far as tax is concerned, you may be eligible for a deduction of up to 20% of your rental income from your income taxes.
The total amount Airbnb property owners can deduct will depend on how profitable the rental is, meaning the amount of money you make from your property will be factored into the equation. There are rental property accounting softwares available online to help Airbnb property owners calculate these figures, with the end result being worth up to 20% of your taxable business income for the year in question.
Does Airbnb Withhold Taxes for Property Owners?
As Airbnb is expected to report any income earned in the US to the IRS, the site is required to request taxpayer information from hosts. Airbnb’s official policy states that if property owners fail to release up-to-date tax information, the company will withhold taxes from the host’s payouts.
The exact amount that Airbnb is entitled to withhold will typically land somewhere between 24% – 28% of the property owner’s earnings, which in many cases may be a greater amount than is actually owed. For this reason, it’s advisable that hosts frequently review their tax information.
If a property owner learns that income is being withheld from their payouts by Airbnb, it may be possible to claim these funds as a credit on future tax returns. To achieve this, property owners must fill out their Form W-9 taxpayer information to report all rental income on their tax returns.
How Location can Affect Property Tax Rates
The amount that homeowners are expected to pay in property taxes can vary significantly depending on the location of the property. As property taxes are used to fund public services such as education, police and fire departments, local city and county governments typically hold area-specific budget hearings to determine a suitable property tax rate for the local community.
This distinction means that property tax rates associated with some states or even specific cities can be notably higher than those in surrounding communities. For Airbnb property owners, in particular those renting out properties in a state in which they do not live, these local variations in expected property taxes can be difficult to navigate and potentially costly if miscalculated.
How are Property Taxes Calculated?
Airbnb hosts must understand how property taxes are calculated to gain a clearer picture of the quality of their investments. The main factor in this calculation, as is to be expected, concerns the current value of the property in question, including the value of the land the home is built on.
Official tax assessors are commissioned to evaluate US properties every 1 – 5 years, and will then charge the homeowners an appropriate rate in line with defined taxing authority standards. For this reason, property taxes rates can vary over time, meaning Airbnb hosts must commit to frequently reviewing property values in each state / city that their rental business is operating in.
Additional Property tax Calculation Information
Alongside the value of the property, tax rates take into account the number of city and school districts that the property exists within. Tax rates associated with these districts are combined with the value of the property to produce an aggregate rate, commonly known as the mill levy.
Individual cities, counties and school districts each have the power to levy taxes against the properties that fall within their boundaries. These unique rates are then grouped together to calculate the total mill levy that will be applied to all owned properties in the surrounding area.
Understanding the financial value of the mill levy will help Airbnb property owners to estimate expected property tax rates. Essentially, one mill represents one tenth of a value, meaning for every $10,000 of assessed property value in a specific district, one mill would be equal to $10.
In real terms, this means if the total property value in a district is equal to £100 million, and local officials decide they require $1 million in tax revenue to function effectively, the mill levy applied to homes in this location would be calculated as follows – $1 million ÷ $100 million = 1%.
Example of a Realistic Property Tax Evaluation
The exact amount that Airbnb property owners should expect to pay in property taxes will be calculated using 3 important values, these are:
- The assessed value of the property
- The local jurisdiction’s assessment rate
- The mill levy associated with the location
This means if a property valued is at $750,000, and the local juristiction’s assessment rate is 8%, the total assessed value would be equal to $60,000. Multiplying this value by the mill levy applied to the area, for example 2%, would equal a total amount of property tax due of $1200.
Understanding the importance of these figures should help Airbnb property owners to learn how high property values are not always the root cause of high property tax rates. Meaning investors must research wider mill levy and assessment rates in areas they wish to operate rentals out of.
Property Tax Rates by State
To help existing Airbnb property owners and any investors interested in starting an Airbnb rental business find ideal locations in which to purchase new properties, below is a number of insights into property tax rates by state. These figures, combined with property values and demand for short-term rentals in each area, can be used to assess the quality of new property investments.
Top 5 lowest Property Tax Rates
Though wider factors must also be considered when evaluating the potential of new investment properties, locating areas with low property tax rates can be a good place to start. According to figures published in 2023, the five US states with the lowest property tax rates are as follows:
|Avg Effective Tax Rate
|Median Property Value
|Median Property Taxes Paid
Analyzing this data reveals that while, for example, the property tax rate in Hawaii is lower than in any other state, the median property value is quite high. This means the relative amount of property taxes paid by Hawaiian homeowners is actually likely to be greater than in other states.
This example should help to illustrate how multiple factors can influence investment potential.
Top 5 most Visited States (2022)
Tourism rates relative to the location of Airbnb investment properties will also have a significant impact on the profitability of rental units. While property values and property tax rates might be lower in some areas, Airbnb units will only be profitable if there’s a market for short-term rentals.
According to data published by Statista in 2022, the top 5 most visited states in the US are:
- New York
- Washington DC
Cross-referencing this with property tax values by state reveals Washington DC to have the lowest average property tax rate (0.57%), though with a median home value of over $630,000, homeowners in this state will still be expected to pay a relatively high amount in property taxes.
5 States with Investment Potential
Taking into account both average effective property tax rates and tourism rates associated with different states, Airbnb hosts may be able to identify a few areas worth investigating further in a search for profitable investment opportunities. Below are five states with investment potential:
|Avg Effective Tax Rate
|Median Property Value
|Median Property Taxes Paid
|Tourism Ranking 1 – 50 (Statista)
Owning and renting out properties through services like Airbnb can be an incredibly lucrative business venture, though property owners must make sure they understand how these rental properties are taxed. By keeping track of property taxes in your area, and taking advantage of the deductions and rules covered in this post, Airbnb property owners can make the most of their investments and ensure that their businesses continue to thrive for many years to come.