If you’re planning to rent out your vacation home, it’s important to understand the tax implications of doing so. Vacation rentals are subject to several different types of taxes, which can vary depending on where your property is located and how it is rented out.
Transient occupancy tax (TOT)
One of the most common taxes that applies to vacation rentals is transient occupancy tax (TOT), also known as hotel tax or lodging tax. TOT is a tax on short-term stays in hotels, motels, and other lodging establishments, including vacation rentals.
The rate of TOT varies by location and can range from less than 1% to over 15%. It’s typically calculated as a percentage of the rental amount, and the responsibility for paying the tax falls on the property owner or manager.
Example:
If you rent out your vacation home for $1,000 per week and the TOT rate is 10%, you would owe $100 in TOT for each week that the property is rented out.
State and local sales taxes
In addition to TOT, vacation rentals may also be subject to state and local sales taxes. These taxes are typically applied to the total cost of renting a property, including any cleaning fees or other charges.
Like TOT, the rates of state and local sales taxes vary by location. Some states have no sales tax at all, while others have rates that exceed 10%.
Example:
If you rent out your vacation home for $1,000 per week and the combined state and local sales tax rate is 7%, you would owe an additional $70 in sales tax for each week that the property is rented out.
Occupancy limits
It’s important to keep in mind that many cities and counties have occupancy limits for vacation rentals. These limits may restrict how many people can stay in a property at any given time, and failure to comply with them can result in fines or other penalties.
In some cases, occupancy limits may also affect the amount of TOT that is owed. For example, if a city has an occupancy limit of six people for vacation rentals, the TOT rate may be higher for properties that exceed that limit.
Special taxes and fees
Finally, it’s worth noting that some cities and counties impose additional taxes or fees on vacation rentals. These may include things like licensing fees, inspection fees, or special assessments to fund local tourism initiatives.
If you’re considering renting out your vacation home, it’s important to research the tax implications in your area and factor them into your rental pricing. By understanding the various taxes and fees that apply to vacation rentals, you can ensure that you are complying with local regulations and avoiding any unexpected tax bills down the line.
- Summary: Vacation rentals are subject to several different types of taxes.
- Transient occupancy tax (TOT): Tax on short-term stays in hotels and lodging establishments.
- State and local sales taxes: Applied to total cost of renting a property.
- Occupancy limits: Many cities and counties have occupancy limits for vacation rentals.
- Special taxes and fees: Some cities impose additional taxes or fees on vacation rentals.
The Bottom Line
Before you rent out your vacation home, it’s important to understand the tax implications of doing so. From transient occupancy tax (TOT) to state and local sales taxes, there are several different types of taxes that may apply to your rental property. By researching these taxes ahead of time and factoring them into your rental pricing, you can ensure that you are complying with local regulations and avoiding any unexpected tax bills down the line.