Tax Planning

Quick Guide to Understand Your Tax Options When You Rent Via Airbnb, VRBO and Other Short-Term Apps

Quick Guide to Understand Your Tax Options When You Rent Via Airbnb, VRBO and Other Short-Term Apps

If you have a first or second home that you feel comfortable renting out to strangers, you’ve no doubt taken note of the success of Airbnb, VRBO, HomeAway and other online rental sites. These platforms have helped countless owners earn extra cash by matching their properties to people who need a place to stay. If you’re thinking of signing on yourself, you need to be aware of how the special laws in place regarding the tax treatment that these transactions demand.

Depending on how long your property is rented, you may be required to pay substantial taxes on your rental income, while in other situations there will be no tax impact at all. Whether your short-term rental transaction (30 days or less on average) is considered business income or not has all been addressed by tax laws: if you’re considering getting involved in online rentals, you need to familiarize yourself with these rules.

If you rent your property for less than 15 days per year

Good news! This type of short-term rental is not taxable and is not required to be reported to the IRS. The flip side of this is that you can’t deduct any of the expenses associated with having rented it out, and you don’t prorate your mortgage or property tax – you report the full amount of both as itemized deductions just as you always have, using Schedule A of Form 1040.

Is it a Rental or a Business?

The rules that determine whether having paying customers use your property is a rental or a business weigh both the amount of time that the property is used by another and by the level of activity involved. Referred to as the 7-day rule and the 30-day rule, the determination is based on whether the activity is considered passive or not. While a rental is viewed as passive, a customer charging others for use of their property is considered a business if the customer is there for 7 days or less. It is also considered a business if the customer is there for 30 days or less if significant personal services are provided in support of the property or client, whether provided by the owner or somebody on behalf of the owner. It is also considered a business if extraordinary personal services are being offered to those staying in the property.

The determination about whether your property is a trade or business or whether it’s a rental is essential, as it is what decides how income and expenses will be recorded, as well as prorated interest and taxes. According to IRS Publication 527, if the rental is a business it needs to be reported on Schedule C, while long-term rentals that don’t provide these services are reported on Schedule E. The regulation specifically describes the services that do and do not fall under the definition of substantial, saying that cleaning and changing linen or providing maid service requires reporting rental income and expenses on Schedule C, while furnishing heat and electricity, collecting trash or cleaning public areas does not. It also provides exceptions to the rule, pointing out that in high-grade commercial or residential real estate it is common for both public area cleaning and trash collection to be provided and for maid and linen services costing less than 10% of the rental fee. If that is the case in a property in question that falls under the 30-day rule, then the designation of significant or extraordinary personal services does not apply.

The Proper Use of Schedule C

Many people make the mistake of thinking that rental income is subject to the same tax that the self-employed have to pay, but that is not the case. It is, however, reported on Schedule C as a profitable rental activity. If you lose money on your rental, you need to determine whether you spent 500 or more hours of your time on the rental of the property: if you did not then the loss is treated as a passive activity, and is deductible only up to the passive income amount (though overage can be carried forward). If you did spend that time, you qualify as a real estate professional who meets the material participation test threshold and are eligible for a special allowance of a loss of non-passive income up to $25,000. This allowance, which does not apply to activity reported on Schedule C, phases out based on your modified adjusted gross income if that number is between $100,000 and $150,000.

Though we’ve attempted to make this information simple, it is actually quite and complex, and it’s important to get your tax filing right, or you could face significant penalties. Whether you’re considering renting a property out or already have, make sure you speak to an experienced tax professional to find out exactly how the rules apply to you and learn about your tax liability.

Gordon W. McNamee, CPA writes for TaxBuzz, a tax news and advice website. Reach him and his team at [email protected] 

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

GORDON W. MCNAMEE, CPA
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