Tax Issues When Renting Your Home on Airbnb or VRBO
Thursday, September 1, 2016
Today many people earn extra money by temporarily renting out their entire home (or a room in their house or apartment) through rental services such as Airbnb, HomeAway, or VRBO. If you do this, you may have to pay federal and state income tax on your rental income. Rental services like Airbnb ordinarily report to the IRS the rental payments they send to their hosts each year by filing IRS Form 1099-MISC. So the IRS will know you have such rental income and expect it to appear on your tax return.
Unfortunately, the tax rules involved can be complex. But it’s up to you to understand and follow them because room and home rental services won’t do it for you.
Tax-Free Rental Income for Short-Term (Less Than 14 Days Annually) Rentals
You can rent out all or part of your home or apartment for up to 14 days per year and all the rental income you receive is tax-free, no matter how much you earn. In
- you rent out your home for 14 days or less), and
- the home is used personally for more than 14 days, or more than 10% of the total days it is rented to others at a fair rental price. (IRC Sec. 280A(g).)
If you only rent out a room in your home or apartment and continue to live in the rest of the space, you’ll have no problem meeting the personal use requirement. But if you rent out the entire home or apartment, you need to keep careful track of your rental or non-rental days.
If you qualify for such tax-free treatment, you may not deduct any operating expenses for the property or take any depreciation deduction. You don’t file Schedule E, the tax form landlords file to report their income and
Tax Issues When Renting Your Home For More Than 14 Days Per Year
If you rent your main residence (house or apartment) over 14 days during the
You list your rental income and expenses on Schedule E. You must pay income tax on any profit left over after you deduct your rental expenses from your rental income. However, your annual rental deductions are limited to your rental income from the home. If your expenses exceed your income, you may not deduct the loss from other income you earn that year. Such a loss can be carried forward to future years and deducted from your rental income from the
You are allowed to deduct your expenses from your rental income, but there are strict limitations designed to ensure that you don’t deduct personal expenses as rental expenses.
Direct Rental Expenses
You are allowed to deduct 100% of your direct rental expenses. These are expenses that apply only to renting, such as fees or commissions you pay to the rental agency, advertising, credit checks, insurance for the rental, cleaning costs, repairs solely for the rental portion of your home, and depreciation (limited to the rental portion of the home).
You may also deduct a portion of your general expenses to own and operate your entire
Example: Paul lives in his Bay Area condominium for 300 days during the year and rents it out for 65 days. The property was used as a rental 18% of the time ( 65 ÷ 365 = 18%). Thus, Paul can deduct 18% of his general expenses up to the amount of rental income he earned from the condo during the year, which was $10,000.
Tax Issues When Operating a Bed and Breakfast or Hotel
In some cases, renting out all or part of your house or apartment can be classified for tax purposes as the equivalent of running a bed or breakfast or hotel. This will be the case if you dedicate a room or rooms in your home solely for the use of paying customers and never personally live in such rooms. You’ll also be classified as running a hotel business if you provide substantial services that are primarily for your guest’s convenience, such as regular cleaning, changing linen, or maid service.
In this event, your rental activity will be treated as a business for tax purposes. This means you’ll have to pay both federal income and self-employment (Social Security and Medicare ) taxes on your rental income, which will increase your tax burden. On the other hand, the restrictions on your deductions described above won’t apply, except that there may still be limits on any annual losses you’re allowed to deduct. Ordinarily, you’ll report your rental income and expenses on Schedule C (Form 1040), Profit or Loss from Business.
Obviously, the way to avoid having your rental activity being classified as a bed and breakfast is not to provide substantial services to your guests—don’t provide them breakfasts, clean their rooms each day, or do their laundry. Charge renters a cleaning fee at the end of their visit that is separate from their daily rental charge.
By Stephen Fishman, J.D. for NOLO