So, are you an Airbnb host? Or maybe you’ve just heard the buzz and want to know more about it? Back in 2015 Time magazine said that “Airbnb is to hotels as Uber is to taxis.” As an Airbnb host, you are part of a brave new tax world, one not yet fully explored by the Internal Revenue Service. Unfortunately, this also means that many tax preparers do not understand the tax rules for Airbnb activities. For some insight into the tax rules governing Airbnb hosting read more.
MINIMUM RENTAL RULE
If your Airbnb property is your home and you rent it for less than 15 days during the year-you need not report the rental income at all.
My advice: If you can, rent for less than 15 days. Then you will need to read no further. If you want to rent out your home for more than 15 days a year–read on.
BUSINESS V. RENTAL
If your Airbnb rental is classified as a real estate rental activity for tax purposes, you’ll need to report it on your Form 1040 Schedule E Supplemental Income and Loss. Its profits will be subject to regular income tax. On the other hand; if it’s classified as a small business, then it must be reported on your Form 1040 Schedule C, Profit or Loss from Business. Schedule C income is “self-employment income” on which you pay 15% self-employment taxes (social security and Medicare) in addition to regular income taxes.
My Advice: Avoid self-employment income like the plague. Read on to learn how.
AVOID SELF-EMPLOYMENT (Schedule C) INCOME
Is the income from your Airbnb rental self-employment income? In most cases, no. However, it can become self-employment income if you act like a hotel and provide your tenants with substantial services like regular cleaning, changing linens, or other maid services. This is why, although Airbnb rentals somewhat resemble bed & breakfasts, they are not the same because an Airbnb host is not required to provide meals or similar services.
My advice: If you want to avoid the self-employment tax– avoid providing substantial services. Do not feed your tenants and don’t provide regular cleaning, changing of linens, or any other maid services.
THE TYPICAL AIRBNB OPERATION – SCHEDULE E INCOME
Let’s assume that you are an Airbnb host and you rent out rooms in your primary residence for more than 15 days per year, but you do not provide substantial boarding services.If your home is rented for more than 14 days, or 10 percent of its rental use, the IRS “Vacation Home” rules apply. You must record personal and rental days and allocate deductions between personal use, reported on Schedule A, and rental use, reported on Schedule E. Rental expenses are limited. See IRS Publication 527 and consider a *FREE ½ hour Consultation* with me.
HOW TO SAVE TAXES — DEDUCTIONS
An Airbnb host is entitled to deduct all “ordinary and necessary expenses” of the rental activity. See Tax Wisardry with Rental Properties
Expenditures that buy you assets that last more than one year (such as the building, a new roof, or air conditioning unit) are called “capital expenditures and cannot be deducted in the year of purchase. For these costs, you may take a depreciation deduction ratably over the item’s useful life. For example, the IRS specifies a 27.5 year useful life for a building used as a residential rental property. This amounts to a 3.636% deduction of the cost per year. Land is not depreciated.
My Advice: To increase your depreciation deduction, separate the cost of items like furniture and appliances, which have a shorter useful life and so generate a larger annual depreciation deduction.
The cost (“basis” in tax language) of your rental property equals the sum of its contract price, plus certain closing costs, plus the cost of improvements. The “adjusted basis” of the property is reduced by prior depreciation deductions. See GAIN OR LOSS.
My advice: For higher depreciation deductions and lower gain on the sale of property, be sure to add to basis all costs of improvements and appropriate closing expenses.
GAIN OR LOSS
If you sell a property, you generally will have taxed gain to the extent its selling price exceeds its adjusted basis, and if you hold a property for 12 months or more, the gain on the sale is considered long-term capital gain, which qualifies for a tax rate of 23.8% or less.
Beware of “phantom gain.” Phantom gain exceeds the cash you receive on the sale. Phantom gain often occurs if the property’s adjusted basis has been decreased by depreciation or if you refinanced the loan and took out cash.
WHAT CAN WIS DO FOR YOU?
email: Wislaughlin@gmail.com for a *FREE ½ hour Consultation.*