What is ‘The Masters Rule’ and what does it mean for short-term rental taxes?

The Masters Tournament, held annually in Augusta, Georgia, is one of the premier events on the golf calendar — although this year, it will be played in November rather than April due to the COVID-19 pandemic.

The event also may be the inspiration for a federal tax rule that every short-term rental host should know.

Generally, rental property owners are required to include residential rental income in their federal income tax reporting. However, “The Masters Rule” states that “if you use a dwelling unit as a residence and rent it for fewer than 15 days … don't report any of the rental income and don't deduct any expenses as rental expenses.”

This means that if an owner rents their property out for fewer than 15 days a year, they don’t have to report that income for federal income tax purposes. The exception was reportedly created due to lobbying by homeowners in Augusta who were accustomed to renting out their homes only during the Masters Tournament once a year.

The Masters Rule is pretty straightforward in its guidance for federal tax income reporting: You don’t have to report the income you’ve received if you’ve rented out your residence for fewer than 15 days a year.

However, federal income tax is not the only kind of tax that short-term rentals must work with.

Most short-term rental hosts are also subject to state and local lodging taxes. These are paid by guests on top of the costs for their lodging, but short-term rental hosts must collect these taxes from guests and remit them to local tax authorities.

This is where the confusion sometimes comes in: Vacation rental hosts may erroneously think The Masters Rule relates to local lodging taxes, but this is incorrect.

The Masters Rule only applies to rental income you report on your federal income tax return. It has nothing to do with state or local lodging taxes, which means that there is no nationwide 15-day exception for lodging tax requirements.

When it comes to lodging taxes, each jurisdiction has its own rules on compliance. The rules that apply to your property will depend on your specific jurisdiction.

In most jurisdictions that apply lodging taxes to short-term rentals, hosts are required to register with the appropriate tax authority, collect taxes from guests, and file lodging tax returns with which they pay the collected amount. Unlike federal tax returns, lodging tax returns in most jurisdictions must be filed regularly throughout the year, often on a monthly or quarterly basis.

In many jurisdictions, if you receive any income at all from a short-term rental, you have an obligation to comply with lodging tax requirements.

In fact, in most jurisdictions, once you start collecting lodging taxes, you’re required to file lodging tax returns each assigned filing period, regardless of whether you had any short-term rental income or any short-term rental taxes were collected. Such returns are commonly known as “zero dollar returns.”

However, there are exceptions. In Massachusetts, for example, if you operate a short-term rental for less than 14 days a year, you aren’t required to collect state lodging taxes. But this is a fairly rare exception and doesn’t apply to other jurisdictions.

The local nature of lodging tax rules can be a challenge, because no nationwide rules apply, so you have to know the specific rules that apply to you. The key to this is understanding which tax jurisdictions apply to your property and following the rules for each of those jurisdictions.

It’s crucial to keep in mind that your property may be subject to more than one jurisdiction. For example, in Arvada, Colorado, which recently legalized short-term rentals, short-term rentals are subject to city sales and lodging tax as well as state sales tax.

Both jurisdictions have their own rules, registration requirements, filing dates, and more, which means that hosts need to be aware of the rules for both. While both types of taxes are collected from guests at once when the bill is paid, the tax amounts will need to be remitted to each jurisdiction separately, according to their respective rules.

Knowing the difference between federal income tax rules and local lodging tax rules will give you a head start in getting your short-term rental taxes done right. But there’s a lot more to know about lodging taxes, including which lodging taxes apply to your property, what the rates are for those taxes, and the correct way to register and file lodging tax returns for each jurisdiction.

Complying with local lodging tax requirements can be confusing and time-consuming, but short-term rental hosts can get help. MyLodgeTax automates and simplifies short-term rental tax compliance, including registration and filing with state and local tax authorities, to ease the burden.

No one wants to spend more time on taxes, but we’re here for you. If you have tax questions related to vacation rental properties, drop us a line and we’ll get back to you with answers.