Running a successful homesharing business using platforms like Airbnb can be a lucrative enterprise when done correctly. But as a homeowner, it’s up to you to act thoughtfully and consider all aspects of the business ahead of time. For example, have you thought about tax strategies for your rental income? Most likely not, but you certainly should. Any expense you have including purchasing proper insurance, advertising, property taxes, etc., (and more on that later) for your rental period are considered deductible whether you operate as a sole proprietor, an LLC, or a corporation. Of course, you have to keep proper records, but those deductions really add up.
Homes used for both personal and rental purposes fall under Section 280A of the Internal Revenue Code. Like much of the tax code, Section 280A relies on a confusing layer of defined terms that underlie each other like Russian nesting dolls. But homeowners who carefully look at the tax consequences of their rentals can save on unnecessary headaches down the line. In other words, it’s the smart thing to do. Here’s what you need to know.1. Fill Out Your W-9
As a homeowner, there are probably plenty of things you could prioritize above sending Airbnb your W-9. However, doing so early means avoiding the 28% automatic withholding rate that Airbnb, VRBO, and other home-sharing platforms are required to enforce by law. Your effective tax rate will most likely be lower than 28%, so file your W-9 and reduce your withholding percentage. Don’t let the IRS hold your funds until the end of the fiscal year.2. Count Your Personal vs. Rental Days
When it comes to reporting short-term rental income, the key is to count your days. The IRS will use the number of days you use your home either for “rental” or “personal” purposes in a given year to decide how your income should be reported. Generally speaking, if you rent the entire home at fair market value, that day will be treated as a “rental” day. In other words, days where you rent your home on Airbnb to non-family members will count as rental days.
In comparison, a day will be treated as a “personal” day when any part of your home is used by the homeowners, family members of the homeowners, or anyone that is not renting. The IRS also defines personal days to include days you rent the home at a discounted rate, or days you offer the home to someone as part of a home-swap or trade. One important caveat to this rule is that days you spend cleaning, repairing, or maintaining your home are counted neither as personal or rental days.
Take this example: John owns a home in Augusta that he hopes to rent during the Masters. John decides to spend the 6 days of the tournament in the home of an Atlanta businessman in exchange for 1 day’s stay in his Augusta home. John then rents the house on Airbnb to a couple from New York for the next 2 days, and rents the house to a friend at a 50% discount of his Airbnb rate for 2 more days. Finally, John allows his sister and brother-in-law to stay in the house for the final tournament day. Under this scenario, John has 2 rental days and 4 personal days.
What happens if you rent a room versus an entire home? If you are just renting a room, be ready to count every day that you used the home as your residence and rented a room as both a “personal” and “rental” day.
For example: Liz lives by herself in a two-bedroom home in New Orleans. Looking to make a quick buck, she rents her extra room on Airbnb for 10 days to a college student from Alaska looking to enjoy the warmer weather. In this case, Liz has 10 rental days and 10 personal days.
As will become obvious below, counting your rental and personal days can have big tax consequences. Keep good records of who used the property when and for how long. Come tax season, you’ll be glad you did.
3. Decide Whether You Need to Report Your Income
Once you have counted your personal and rentals day, you will need to answer two questions to determine your reporting requirements. Did you use your room or home for fourteen rental days or fewer? And, did your number of personal days add up to either 10% of the total days rented or fifteen days or more? If you answered yes to both questions then congratulations, you don’t have to report the income at all. Pocket the cash and feel good about your entrepreneurial success!
For those lucky individuals who don’t have to report, keep a record of the days you rented your property in case the IRS asks. In addition, while your income might come tax free, it does come at the expense of most of your possible deductions. That means, with a few exceptions for mortgage interest payments and real estate taxes, you won’t be able to take any tax deductions for your Airbnb activities.4. If You’re Reporting Income, Pay Taxes and Take Appropriate Deductions
If you answered no to either question above, then things get a bit more complicated. The bad news is that you’ll have to report your income and pay taxes in some form. The upside is that you can mitigate your tax liability by thinking carefully about how you rent your home.
Even if you are required to report your short-term rental income, you may not be required to pay self-employment taxes. The IRS requires you to pay self-employment taxes on rental income where you provide “substantial services” to your renters. We can boil down the test by asking - are you providing hotel-like services in renting your home? Example of “substantial services” include: cleaning the rented parts of the home while occupied, providing meals or coffee to guests, or any other services that might be associated with a traditional bed-and-breakfast. In contrast, if you are just providing the basics - heating, water and gas, Internet, and clean common areas - then the IRS won’t penalize you with the additional 15.3% self-employment tax.
But even if you do end up paying self-employment taxes on your rental income, don’t fret, you can still save money by claiming appropriate deductions. In general, as an Airbnb host, you can normally deduct rental expenses from your taxable income up to the amount of rental income you generated in that year. So, for example, if you earn $10,000 in rental income over the entire year and $12,000 in deductible expenses, the max amount you’ll probably be able to deduct from your income is $10,000.
How exactly do you know what your deductible expenses are? The list of possible deductible expenses is long and complicated, but it can be a big money saver if properly determined. Some expenses associated only with your rental activity, like advertising and proper commercial insurance when used for the rental portion, will be fully deductible. Conversely, mixed-used expenses, like utilities and depreciation, will be limited by your number of personal days at the home and the square footage of the rented space (i.e. whether its your whole home or just a room).
Ultimately, the list of possible deductions is vast, including: auto and travel expenses, cleaning and maintenance, insurance, repairs, property taxes, casualty losses, and even your Airbnb Service Fee. To get a full picture of how to deal with each of these expenses, keep your receipts and bills in order and consult an accountant.
Take the four steps above as your starting point to understanding homesharing taxes. Moral of the story - learn about your tax obligations, research those local and state rules, get your paperwork done early, and keep tabs of where you stand. With that out of your mind, you can then go back to refurbishing that second room you’re hoping to list.
Disclaimer: This article is intended solely for information purposes and no reader or third party should rely on this information for tax, legal, or other reasons. For specific consultation, talk to an expert.