Thanks to the growing popularity of Airbnb, renting out your personal residence is now easier than ever. As more people offer their properties for rent, they are discovering a host of new tax issues to consider. While some Airbnb income may be exempt from federal income tax, this might not be the case when it comes to state and local taxes. Before you rent out your home, ensure that you understand the tax and insurance consequences of your actions.
State & Local Taxes
Even if a weekend rental is free of federal income taxes, hosts may still be responsible for the collection and remittance of state and local taxes. Airbnb has started collecting taxes and providing primary insurance coverage in order to streamline the rental process, but the homeowner is still ultimately responsible for handling insurance and taxes.
Tax Status Of Rental Income
While renting out your primary residence can provide additional income, rental proceeds could be subject to federal and state income taxes – depending on the length of the rental. Airbnb will send you Form 1099-K after the end of the tax year. This form discloses your total annual rental income, which you will include when filing your federal income tax return.
State and local taxes are generally paid by your guest, but it’s your responsibility to determine whether or not the tax applies – and to ensure that the proper amount is remitted to the government. Airbnb may collect and remit local hotel, lodging, or sales taxes for you automatically, but this service isn’t provided nationwide. Vacation property rental laws can be complex, but it is your responsibility to completely understand and comply with state and federal regulations.
Tax laws always have exceptions, and the 14-day rule is the most important one for anyone renting out their home. IRS regulations permit tax-free property rentals of fewer than 15 days per year. As long as you rent out your property for no more than two weeks, you won’t owe federal income tax on your rental proceeds – regardless of the amount. You’re not permitted, however, to deduct any expenses related to this tax-free rental. That privilege is reserved for only those properties that are rented out for more than two weeks out of the year, and are therefore subject to federal income taxes.
To comply with the law, Airbnb may still report all income you receive from short-term rentals to the IRS, even when the rental period is under two weeks. Many state and local governments impose occupancy taxes on short-term rentals. These can vary quite a bit from one jurisdiction to the next, from the name of the tax – hotel tax in some states, transient lodging tax in others – to the rates and the rules.
For rental periods exceeding 14 days, the income generated from your primary residence (or a portion thereof) will be included in your taxable income. You can, however, deduct expenses to reduce your tax liability. When you purchase new towels for your guests or repaint a room, you can deduct these expenses from your rental income. Here are some of the most common rental property expense deductions:
The IRS provides guidelines to help you determine which expenses may be legitimately deducted for rental property. Costs related directly to the rental process are fully tax-deductible. Common direct expenses include advertising costs, depreciation, repair costs, rental agency costs, commissions, and cleaning costs. The fee you pay to Airbnb is 100% deductible from your reported rental revenue, as well.
Indirect rental expenses are those costs you would have incurred regardless of your decision to rent your property. You’re allowed to deduct these expenses based upon the proportion of rental use to total use. For instance, if you rented out your home for 30 days out of the year – using it personally for 140 days – the proportion of indirect rental expenses you could deduct would be 30/170, or 18%. Common indirect rental expenses include general maintenance, repairs, mortgage interest, taxes, and insurance for your home.
Deductions can’t generate a loss for residential properties
If a home is rented for more than 14 days, with personal property usage exceeding the greater of 14 days or 10% of rental days – the property is considered a primary residence according to the IRS. When a piece of rental property is also a primary residence, the IRS allows both direct and indirect expense deductions – up to the total amount of rental income. This means that these expenses cannot be used to claim a loss. When qualified expense deductions exceed rental income, the loss may be carried over and applied to future income taxes in coming years. You must maintain records of the number of rental days, as well as the number of days your property was used as a residence. If you rent out your property for more than 14 days, you should keep precise records of the rental dates, so you can accurately separate personal from business expenses. Depending on your current income, it’s possible that your anticipated rental income could push you into a higher tax bracket. If so, renting out the property could be a mistake. If you’re unsure about the impact that renting out your property will have on your income taxes, check with a CPA first.
In October of 2015, Airbnb began offering Host Protection Insurance, which acts as primary coverage of up to $1,000,000 for third party bodily injury or property damage claims. Additionally, the company provides a separate $1,000,000 Host Guarantee, covering certain personal property damage caused by your guests. This Host Guarantee is not insurance, and should not serve as a substitute for homeowners or renters insurance. While the addition of Host Protection Insurance as primary coverage is a positive development, coverage is generally more limited than a homeowners policy would be. Be sure to speak with your insurance agent before renting out your property, since your policy might define the rental as a business activity – excluding it from coverage.
As this article revealed, deciphering the tax consequences of a part-time rental is no picnic. You could wind up with tax-free cash, a disallowed loss, or something in between. Before you rent out all or a portion of your home, its critical to understand the tax consequences you will be subjected to come April 15.
The information herein is general in nature and should not be considered insurance, legal or tax advice. Please consult with an insurance legal or tax professional for additional information on specific situations.
Investment advisory services provided by Werba Rubin Wealth Management, LLC (“Werba Rubin”). Securities transactions are offered through a non-affiliated entity, Loring Ward Securities Inc., member FINRA/SIPC.