Owning a short-term rental property can be a lucrative investment, especially in a high-demand city like Seattle. However, managing the tax responsibilities that come with rental income can be challenging, especially if you’re new to the industry. Navigating the various tax types—federal, state, and even local—requires careful planning and understanding.

Here are six essential tax categories every short-term rental owner should be aware of:

1. Income Tax: Report Your Rental Earnings Annually

First and foremost, any income you generate from your short-term rental must be reported on your federal and state income tax returns. The IRS considers income from short-term rentals as taxable, whether you rent out a property for a weekend or the entire year. You'll need to file this income annually, and it will be added to any other income you’ve earned throughout the year.

What Can You Deduct?

The good news is that you can deduct several expenses related to your rental property. These may include:

• Mortgage interest: If you have a mortgage on the property, the interest portion can be deducted.

• Property management fees: If you hire someone to manage your rental, those costs are deductible.

• Repairs and maintenance: Any money spent on necessary repairs or upkeep of the property can be deducted, but upgrades or improvements may need to be depreciated over time.

• Utilities and insurance: These ongoing costs can also be written off against your rental income.

The goal is to subtract these expenses from your total rental income to reduce your taxable income.

IRS Special Rules

If you rent your property out for fewer than 14 days a year, the IRS allows you to pocket that income tax-free. However, once you exceed 14 days, you must report all earnings, regardless of how much you made during the year.

2. Occupancy Tax: A Guest-Paid Tax

Also known as lodging tax or transient occupancy tax, this tax applies to guests staying at your rental. In Seattle and many other cities, short-term rentals are treated similarly to hotels. Guests are charged a certain percentage on their stay, which is collected by the host (you) and then submitted to the local tax authorities.

How Much is the Occupancy Tax?

Seattle's current transient tax for short-term rentals hovers around 10.1%, but it’s crucial to confirm the exact percentage based on your property’s location. Keep in mind that this tax is typically paid by the guest, but you are responsible for collecting and remitting it to the appropriate local government office.

What to Know About Compliance

Failing to collect and submit occupancy tax could result in fines or penalties. Platforms like Airbnb and Vrbo may handle occupancy tax collection on your behalf, depending on where your property is located. Make sure to check with the platform you use to see if they remit the tax automatically, or if it's your responsibility.

3. Property Tax: Based on Your Property’s Value

Like all homeowners, short-term rental owners must pay property taxes annually. These taxes are based on the assessed value of your property and vary depending on the location and size of the property. In Seattle, property taxes help fund public services such as schools, parks, and infrastructure.

Tax Considerations for Short-Term Rental Owners

Short-term rental properties may be subject to higher property tax rates than a primary residence. In some cases, local governments treat short-term rentals like commercial properties, which can increase your tax liability. Make sure you know whether your property is classified as residential or commercial, as this can affect the amount you owe.

4. Business License Tax: Required in Some Locations

In many cities, including Seattle, operating a short-term rental requires a business license. This is typically a flat fee that allows you to legally operate your rental. Without this license, you could face penalties or even be forced to shut down your operation.

How Does the Business License Tax Work?

Obtaining a business license often means registering your short-term rental with the local city government. The process is usually straightforward, and the annual fee is relatively small compared to other costs associated with running a rental. In Seattle, short-term rental operators are required to pay for both a Business License Tax Certificate and a Short-Term Rental Operator’s License, both of which need to be renewed annually.

5. VAT/GST: Applicable in Certain Countries

If you own a short-term rental property in a country that charges VAT (Value-Added Tax) or GST (Goods and Services Tax), you will need to understand how these taxes work. While VAT and GST are more common outside the U.S., it’s important to note these taxes if you're managing properties in different countries or considering expanding your portfolio internationally.

What Is VAT/GST?

VAT and GST are consumption taxes that apply to most goods and services, including short-term rentals. In this case, you would need to charge VAT or GST to your guests and remit it to the appropriate government body. Tax rates vary by country, so be sure to consult with a tax professional if your property is subject to VAT/GST.

6. Capital Gains Tax: For When You Sell Your Rental Property

If you decide to sell your short-term rental property, you may be subject to capital gains tax. This tax applies to the profit made from selling an asset, such as real estate, and the amount depends on how long you’ve owned the property and how much profit you’ve made.

Short-Term vs. Long-Term Capital Gains

• Short-term capital gains apply to properties held for less than one year and are taxed at the same rate as your ordinary income.

• Long-term capital gains apply to properties held for more than one year and are taxed at a lower rate, typically between 15% and 20%.

Reducing Your Capital Gains Tax

If you live in your rental for at least two years out of the five years before the sale, you might qualify for an exclusion on part or all of your capital gains under the IRS Primary Residence Exclusion rule. Additionally, a 1031 exchange can help defer capital gains taxes if you reinvest the proceeds into another rental property.

Understanding the various taxes involved in owning a short-term rental is crucial to ensuring your business runs smoothly and profitably. From income taxes to capital gains, staying on top of your tax obligations can help you avoid costly surprises down the line. Whether you’re just starting out or are a seasoned host, keeping these six tax types in mind will set you up for long-term success.