This month, Airbnb starts collecting taxes from hosts of short-term rentals in Los Angeles. Massachusetts will not follow this lead. Even after Airbnb lobbied for a recent tax proposal that would have extended hotel levies to short-term rentals.
The defeat wasn’t a complete surprise, because Governor Charlie Baker has said he would not raise taxes on private rentals. Others have noted that the additional income (up to $20 million per year) could be helpful in expanding the state’s earned income tax credit.
Taxing short-term private rentals through sites such as Airbnb and VRBO has long been the request of hotel and motel owners across the state. They are subject to state and local taxes that can increase a bill by nearly 15 percent.
Renting an extra space or vacation home can often lead to extra income. Airbnb tracks all bookings along with any fees that the service deducts. The website sends out a 1099 at the end of the year.
In effect, renting turns you into a small business owner. Besides for fees charged by the booking platform, you may have other expenses related to your rental. If you rent a portion of your home, you may be able to deduct a portion of your rent or mortgage payment.
A separate property may require cleaning between guests as well as a lawn service and occasional repairs. Keep track of all these expenses, because you should be able to write them off against your income. But make a mistake with deductions and you could open yourself to an audit.
Failing to report 1099 income or pay taxes on it can lead to serious situation. Remember Airbnb and other websites file duplicate 1099s with the IRS, which the service matches up against your return. The oversight of leaving 1099 income off your tax return is a red flag that could kick off a full-blown tax audit. If an audit finds you underpaid your tax bill, you could owe penalties and interest.
If you receive a letter from the IRS, contact a skilled tax attorney for guidance on how to resolve the problem.