Rental property investing has always been popular- but the emergence of short term rentals over the last 10+ years has supercharged and changed the industry in ways we are still learning.
Oh, and it has also impacted how we keep the books for these investments! Generally speaking, short term rentals provide greater cashflow- which means more deposits, more expenses, and more bookkeeping work in general. That's where REI Hub comes in.
Keeping the books for a short term rental and a long term rental isn't that different beyond the difference in transaction volume. In both cases you categorize your transactions by type (expense, revenue, loan payment, etc.), property (and unit if applicable), and account (Supplies or Repair expense). But, there are still some nuances to consider.
In this guide, we will discuss and provide resources on how to set up and keep the books for a short term or vacation rental in REI Hub.
First things first: getting oriented in REI Hub, and setting up the fundamentals of your short term rentals.
While clicking through the system, and certainly using it for your rental business, are great ways to get familiar with REI Hub, we still recommend you read through our Overview and Getting Started Guide
. It provides a summary of REI Hub's component parts and concepts, as well as links to more detailed more resources (many of which are also included below).
Make sure your short term rentals are created as properties in the REI Hub system. If you utilize a dedicated rental business operating account (or multiple accounts), link them to securely import transactions automatically.
Alternatively, you can use manual accounts
and either upload transactions or enter them manually. If your properties are financed, add the loans and fill out the loan payment template from the Loans page.
Booking short term revenue from the Import Feed
After you link your operating bank account (or upload transactions), you will have deposits in your import feed from your short term rental platform of choice. These deposits often include both revenue (rent) and expenses charged by the platform (commissions or management fees).
Using the Net Income transaction type
To most easily account for transactions that are comprised of both revenues and expenses, use the Net Income transaction type. Net Income transactions are useful for both short and long term rentals.
The IRS requires that real estate investors report their gross income and expenses, not just the net revenue received after expenses. If you book a deposit that includes revenues and expenses as just as smaller amount of revenue, your taxable income may technically be the same, but the IRS will not be pleased with how you arrived at that number.
Default Airbnb net income rule
The REI Hub system contains a default matching rule for deposits from Airbnb. This rule automatically calculates the standard 3% fee that Airbnb charges hosts, and books the deposit as a Net Income transaction with the Airbnb fee as a Commission expense.
Airbnb is not the only short term rental platform that charges a fee, but they are the most consistent in the amount and application of said fee, which is why REI Hub has a rule in place for Airbnb but not others. For VRBO, Booking.com, Hostaway, and others you may need to consult the platform payout records to see the exact amount fees.
Split the deposit by property contribution
If the deposit from your short term rental platform includes funds from multiple rental properties, you can split the import transaction into the net amount per property. Any given transaction can only be associated with one property (or no properties, as for Portfolio level transactions) so to touch multiple properties, we need multiple transactions.
Splitting the original deposit transaction (parent) from the Import Feed creates additional transactions (children) in the amount you designate with 'split' appended to the description. Each child transaction can now be booked as a Net Income to the appropriate property.
The per property net amount can be found in your short term rental platform's payout report.
Booking short term rental revenue using Property Management accounts
The above process follows the default, bank account centric, path for booking deposits from short term rental platforms into the component revenues and expenses by property. However as you have more properties active on a given platform, splitting the transaction on the import feed into more and more pieces, you may desire an alternative approach.
When you use a Property Management account, you book the property by property revenues and expenses (or Net Incomes) directly to the Property Management account, where they are recognized for tax purposes. The associated payouts or net deposits from your short term rental platform (represented by the Property Management account) are then booked in as 'Transfer between Accounts' transactions.
This reflects the real world flow of funds from the guests paying the rents to the short term rental platform, who aggregates it and charges you fees before transferring the remainder to you. You will see the same thing on your Balance Sheet- when entering your rents you will see the STR platform Property Management account balance increase, and then decrease when you book the transfer into your bank account.
Practically, using this method means that you never have to split the deposit in the Import Feed. You do still need to enter in the property by property information from your short term rental platform payout statement, but not having to pre-split an aggregated multi-property deposit into multiple specific pieces can be a time saver!
When using this method, you will book ALL deposits from your STR platform as a Transfer between Accounts.
And you will enter in the property by property information by navigating to the Property Management account for your STR platform and manually entering in the revenues, expenses, or net incomes by property.
Remember- you don't want to mix the two different methods discussed above of booking deposits from your STR platform.
Short term rental expenses
Entering in the expenses associated with operating your short term rental business is straightforward and pretty much the same for long and short term rentals, even if the number and nature of those expenses is slightly different.
Using the Import Feed and Transaction Matching Rules
If you have linked your operating bank accounts, as is highly recommended, you will book the vast majority of your expenses off of the Import Feed. Even if you don't link an account, you can upload transactions via Excel
to still take advantage of the Import Feed.
Use Transaction Matching Rules
to automatically recognize or book imported transactions based on the description or amount of the transaction. This is a great fit for simple expense transactions and helps make the system work for you!
Default expense accounts match the IRS Schedule E
REI Hub comes pre-loaded with a Chart of Accounts focused on rental property investors. The default expense accounts are an exact match to the IRS Schedule E, meaning the shortest possible distance between keeping your books and being ready for tax time.
The Schedule E is the part of the 1040
personal return where investors report income and and expenses from their passive investments (e.g. rental property). Investors report both long term and short terms on the Schedule E. If you provide substantial additional services - such as being a true bed and breakfast - you are probably a Schedule C filer instead.
Having the default expense categories match the Schedule E is quite convenient, but sometimes you may want more granularity and business intelligence than those 15 default account provide. REI Hub allows you to easily update your Chart of Accounts
and add new accounts or subaccounts based on your individual needs.
Portfolio level expenses
In addition to booking transaction directly to properties and units, REI Hub also allows you to book transactions to the Portfolio level of your account
. This is a great way to easily track expenses that apply to all of your properties, without having to split the transaction into multiple pieces.
At tax time, our Schedule E report
has a handy feature that allows you to prorate Portfolio level expenses across all of your properties. So you are still able to show your numbers on a property by property basis, without having to worry about manually splitting that type of expense.
Fixed Assets and Capital Expenditures
In addition to the standard expenses discussed above, REI Hub can also help you track your fixed assets
(capital expenditures). These costs are recovered over time via depreciation, rather than being expensed against income.
There are a few key fixed assets/ capital expenditures that short term rental property investors should be familiar with, even if you work with a CPA at tax time.
The rental property
First and foremost is the rental property itself - generally your largest fixed asset and therefore the source of your largest depreciation entry. For recent purchases, the initial fixed asset balances (and the journal entry that sets them) are derived from the property purchase closing statement.
In addition to the property itself, the IRS also generally considers the initial outfitting of the rental as part of your investment, and therefore a fixed asset. Startup costs are unique because if they were incurred prior to placing the property in service (listing it for rent), they can be included with the property fixed asset, rather than needing to be tracked separately.
So if you purchase a property and remodel it - or even just paint and furnish - all of those initial startup costs should be booked as Fixed Asset Purchases that increase the initial depreciable basis in the property. Startup costs prior to placing the property in service can't be operational expenses, because the IRS doesn't consider your rental business to have begun until the property is listed for rent.
In the Import Feed, select the Fixed Asset Purchase transaction template for startup costs and property improvements (below).
The IRS considers costs from maintaining and repairing your rental property to be expenses, but costs from improving that property to be fixed assets. Spend $25 at Lowe's to fix a leaky toilet? That's a repair expense.
The de minimus safe harbor election
As discussed above, the IRS primarily looks at the purpose of an expenditure to determine if it should be expensed or capitalized. They also consider one additional factor- materiality.
The IRS offers the de minimus safe harbor election which allows you to expense what would typically be a fixed asset if the individual line item is under $2500. Essentially the IRS doesn't want to deal with a $900 appliance being depreciated over 5 years.
This is a great topic to discuss with your tax preparer.
Occupancy or Sales and Use tax
Some short term rental owners also need to account specifically for occupancy or sales and use taxes. This is largely location and platform dependent- some municipalities have specific requirements, and some direct booking platforms do not handle taxes automatically on your behalf.
Most vacation rental investors will not need to account for this, as Airbnb, VRBO, and other large platforms generally collect and remit occupancy taxes on your behalf.
These pass-through taxes can be handled in REI Hub with a special liability account and the Net Income transaction template.
To create the liability account, navigate to the Chart of Accounts page
and click Add Account. Give the account a name, choose Liability as the type, and uncheck the 'this is a subaccount' box. An account sub-type menu will appear, select 'Sales and Use Tax' from the options.
You will now be able to select the newly created liability account as a line item in the Revenues section of a Net Income transaction. The tax collected will not actually be recorded as revenue- it will be held on your Balance Sheet in that liability account until you remit the taxes, at which point you will relieve that account.
Reach out to us with any questions!