Airbnb and Online Rental Programs
With an increasing number of homeowners participating in home rental programs such as Airbnb, it is important to know the tax implications regarding this type of rental. In many situations these activities follow the vacation home rental rules (see paragraphs below). When using programs like Airbnb, it is important to remember the following:
- Report rental income only if the home or room rental days exceed 14 days (no deductions are allowed if income is not reported). The 14 day rule applies identically to renting the whole property or just a room
- Keep track of all expenses directly related to the rental if the intention is to rent for more than 14 days. These expenses can offset income dollar for dollar and expenses such as the host-service fee are 100% deductible;
- Allocate all property taxes and mortgage interest paid between personal use and business use if rental days exceed 14 days;
- Fill out a form W-9. Companies like Airbnb are required to withhold 28% of rental income generated if a Form W-9 is not provided. Providing a W-9 can reduce these withholdings;
- Learn about applicable occupancy taxes and whether or not self-employment tax will be assessed.
Minimum Rental Use
With an ordinary rental property the owner reports all income and expenses on Schedule E of their personal income tax return. The taxpayer then includes the net income or loss (subject to limitations) in their total income for the year.
Because vacation rentals benefit the owner as more than just a business activity, they are often treated differently than ordinary rental properties for tax purposes. Vacation rentals fall into one of three categories depending on the number of days it was used personally and was rented out.
- Used personally for less than 15 days: The property is treated as a normal rental. No expenses are allocated to personal use, and losses are subject to normal passive activity loss limitations.
- Rented less than 15 days: The property is not treated as a rental and is not included on Schedule E of the tax return. No rental income or expenses are reported on the tax return. The owner may report property taxes and mortgage interest as itemized deductions on Schedule A.
- Used personally more than 15 days and rented more than 15 days: All rental income is reported on the return and expenses are deducted based on the ratio of rental to total days. In addition, no loss may be claimed on this category of vacation rental and all losses carry forward to future years.
For example, a taxpayer owns a vacation property that is rented for 75% of total days used. If total expenses during the year are $10,000, only $7,500 are reported on the tax return. If the taxpayer reports a net loss on the year, no losses are taken in the current year.
Personal Use Defined
Personal use is not restricted to only the taxpayer and related parties. It also includes use by anyone who does not pay at least fair rental price for that usage. Click here to learn more.
If you have any question on how these rules apply to your particular situation, please do not hesitate to call us at 858-558-9200.