Before you start handing out keys to your home as a host at Airbnb, VRBO, or HomeAway or other home sharing site, make sure you know about reporting and paying taxes. This article will give you an overview of Airbnb taxes: when your host income is taxable, how to take expense deductions, and how to report federal income taxes.
This a general overview; it’s not intended to be tax or legal advice. Airbnb taxes are complicated and every situation is different. Get help from a tax professional.
How to Determine if Your Income as a Host is Taxable
This IRS 14-day rule says that you don’t have to pay taxes on income received from rentals if:
- You rent your home for no more than 14 days during the year, and
- You use the home yourself 14 days or more during the year, or at least 10% of the total days you rent it to others.
The 14-day rule also applies if you just rent out a room or part of the house.
Yes, that means if you just rent a few days a year you don’t have to pay income tax on the money you get, but it also means you can’t deduct your expenses as a host. (Rental days are days when someone pays fair market value for the home or the room.)
Two Situations: Renting a Home vs. Renting a Room
Your tax situation is different depending on whether you are renting a home you own and live in (either in part or entirely) or a home you own and don’t live in (a second home).
Renting a home. If you rent a home you own more than 14 days in a year, you must pay tax on your net rental income (gross income less allowable deductions). If you stay in the home at any point during the year, your personal days must be more than the 14-day or more-than-10 percent limit described above.
Renting a room. Many Airbnb hosts live in their homes and rent out a room. In this case, the 14-day rule applies––you can avoid paying taxes if you only rent a room for less than 14 days.
In both cases, you must keep track of your personal use and expenses for the home vs. rental use and expenses.
Deducting Rental Expenses
To deduct expenses as an Airbnb host, start by dividing your expenses into two categories.
Direct expenses. Expenses directly and only related to your Airbnb hosting are deductible. Examples would be fees paid to Airbnb, advertising, local licenses and fees, and payments to a cleaning service (but only for the part of your home used for guests).
Indirect expenses. You can deduct home expenses, but only for the part of your home used for your Airbnb hosting. Indirect expenses include utilities and internet and depreciation. You can only take these expenses for the days you received a rental income. In addition, if you are renting a room, you have to figure the room as a percentage of your home space and you can only take that percentage.
This article on tax deductions for Airbnb hosts includes a list of deductions and how to record them on IRS Schedule E.
Income Limit on Deducting Rental Expenses
Rental income is considered passive income and you can only deduct expenses on passive income up to the amount of income; you can’t have a loss. So, if you have $5,000 in rental income and $5,500 in expenses, you can only deduct $5,000 in expenses.
Keeping complete and detailed records is a key to more deductions, to lower your income tax bill. Find an online accounting app to help sort it out.
Reporting Rental Income on Your Tax Return
If you and your tax professional have determined that your Airbnb income is taxable, you will report income and expenses on your income tax return on Schedule E. - Supplemental Income and Loss.
Airbnb and other host apps are required by the IRS to report payments made through their service to hosts above a certain level each year. You will receive a copy of the report on Form 1099-K. You may need to report income from your home sharing activity even if it isn’t taxable, to match the amount of income your hosting app sent.
When You Include Services to Your Renters
If you provide “substantial” services to your guests, like breakfast or fresh linens every day, everything changes. You are no longer considered to be a landlord; now you are running a service business. The IRS says services are substantial if they are “a material part of the services” you provide (Rev.Rul. 1983-139).
Becoming a service business means:
- All of your income is taxable (No 14-day rule)
- You must now pay self-employment tax (Social Security/Medicare) on that income, and
- You file your business tax return on Schedule C.
The good news is that your deductions aren’t limited to the amount of your income. You can have a business loss for the year.
The line between rental income and self-employment income is often difficult to see. Check with your tax professional before you file your Airbnb taxes to make sure of your tax classification as a landlord or a business owner.