North Carolina offers a scenic landscape and a relatively mild climate. Parts of it are straddled by the Great Smoky Mountains National Park, which is designated as an international biosphere reserve and an ideal vacation home destination.

Discover how to maximize tax advantages while adhering to federal and local North Carolina regulations, specifically concerning short-term rentals.

What’s considered a short-term rental?

A short-term rental (STR) is a property leased briefly, often 30 days or fewer. Travelers commonly find STRs through online platforms like Airbnb or VRBO. Each city in North Carolina has its own regulations; for example, in Raleigh, STR operators need a zoning permit, and exterior advertising is banned. In Greensboro, STRs are only allowed in residential dwelling units.

When should I report the rental income for my short-term rental?

The United States tax year typically begins on January 1 and concludes on December 31, with annual individual tax returns expected by April 15.

Do I always need to report rental income?

During tax season, rental property owners are required to report rental income earned from vacation rental properties on their tax returns. According to the Internal Revenue Service (IRS), rental income refers to tenant funds, specifically rent payments over 14 days. The good news is that most vacation rental owners qualify for deductible expenses.

There is a 14-day rule, a provision offering potential relief for taxpayers. Under this regulation, income earned from short-term rentals—those lasting no more than 14 days in a year—is exempt from reporting.

How do I report rental income for my short-term rentals?

Usually, you’ll document the income and expenses on appropriate tax return forms, such as the Schedule E Form 1040 or the Form 1040-SR, tailored for individuals aged 65 and above in the United States.

Below are step-by-step instructions to report your rental income using a Schedule E 1040 Form.

Step 1: Gather the proper forms

Staying organized is key to simplifying reporting. Make a list of itemized deductions to include on the 1040 Form. Ensure you retain copies of receipts for all expenses linked to your vacation rental property and rental activities.

Step 2: Determine if the structure of your business is active or passive

A simple way to know whether you’re operating an active or passive business in North Carolina is to view your level of involvement through the lens of the IRS.

Active engagement involves hands-on decisions and managing tasks on a daily basis, similar to having a full-time job. Conversely, passive involvement is when you have minimal engagement with your guests or the rental property while you collect an income. The distinction matters for tax implications.

Step 3: Reporting rental income with a Schedule E (Form 1040)

If you rent out your vacation home on Airbnb and it makes up over 28% of your income, Airbnb needs your W-9 form. If you skip this, they’ll hold 28% of your rental income for taxes. But usually, your actual tax owed on rental income is lower than 28%.

After this step, complete the 1040 Form using your receipts to determine your applicable deductions. Here is a comprehensive guide for reporting income taxes with the 1040 Form. 

Key tax deductions for short-term rentals

Key deductions for STRs in North Carolina include expenses directly related to managing and maintaining the rental property, such as:

• Mortgage interest
• Property taxes
• Insurance premiums
• Utilities
• Repairs
• Maintenance costs
• Cleaning fees
• Property management fees
• Advertising expenses
• Travel expenses
• Office deductions
• Business expenses
• Depreciation deductions

Additionally, expenses incurred while hosting guests, such as supplies, furnishings, and amenities, may count as rental property tax deductions. Consult with a tax professional or accountant familiar with North Carolina’s tax laws, especially if this is your first experience leasing a property. 

FAQ: Short-term rental property tax deductions in North Carolina