Rental property tax tips for Airbnb, HomeAway and VRBO hosts
The sharing economy encompasses many different types of work: driving, running errands, renting out space. But the tax law and IRS don’t see all sharers the same. When it comes to their taxes, drivers and taskers are usually self-employed or small business owners. But the nearly 4.5 million taxpayers who rent out their home, or just a room in their home, are rental property owners – not small business owners. Just because it’s a series of short-term rentals obtained through a new sharing platform does not mean it is treated any differently from other more traditional rental properties. Landlords – whether traditional landlords or hosts with a newer platform like Airbnb, HomeAway or VRBO – need to keep these rental property tax facts in mind:
1. There is no tax impact for renting out their residence for 14 days or fewer.
If they reside or stay at the property during the year and rent it out for 14 days or fewer, taxpayers do not have to report any rental income. There is no dollar limit on this 14-day exception, making this a significant exception for hosts who can capitalize on short-term events in their area like a World Series or presidential inauguration. For example, during South by Southwest, a resident in Austin, Texas may be able to rent out their property for higher than usual due to the demand for hotel rooms and rentals. If they only rent it out during the nine days of South by Southwest, their rental income is non-taxable and rental expenses are non-deductible.
However, the sharing platform may send them and the IRS an information document reporting this income. The IRS will want to know why the taxpayer isn’t including the income on their tax return. The taxpayer should maintain a record of the dates and rent charged to substantiate their exclusion.
2. If they are taxed on the rental, hosts can generally deduct their expenses.
The upside of reporting and paying income tax on rental income is that related expenses could be deductible. If the host or landlord did not use the property personally during the year, their expenses are generally deductible but subject to certain limitations. In addition to deducting the costs of mortgage interest, they may also deduct costs for advertising, cleaning, depreciation, insurance, maintenance, repairs, real estate taxes, utilities and fees charged or withheld by the sharing platform.
If they did use the property personally, they can deduct only the expenses related by time and space to the rental. To figure this limitation, they must calculate the percentage of use by the days rented per year and the percentage of the area rented compared to the overall square footage. For example, a host who rents a 120 square foot room in their 1,200 square foot house for 150 days of the year could deduct 4.1 percent of their related expenses. Their use by space would be 10 percent and their use by time would be 41 percent. This gives them the overall rental use of 4.1 percent. The balance of otherwise deductible expenses (usually mortgage interest and real estate taxes) may be included with itemized deductions on Schedule A.
3. They may be self-employed if they provide “substantial services” to their guests.
By providing “substantial services” to their guests, landlords actually may become self-employed for tax purposes, meaning they may have to pay self-employment tax of 15.3 percent in addition to income tax. Substantial services include things like cleaning the rental while it is occupied, concierge services, tours, meals, entertainment or transportation.
For more information, hosts can review the Airbnb Host Reporting Guide or IRS publication 527 on rental property. They can also consult a trusted tax professional to help simplify the process and make sure they are getting every tax benefit they’re entitled.