Renting out a house, condo, room, or apartment on AirBNB is becoming more and more popular. However, these short-term rentals are treated differently for tax purposes than more traditional long-term lease rentals. As a result, it’s important to be aware of these differences and their impact on your specific situation.
If you rent out your home for less than 15 days during the year, the income is often entirely tax-free. If you use AirBNB or a similar service to find renters for your city home for use over a festival weekend or similar event, you may not have to pay taxes on the income. There are several restrictions to be aware of: the rental days during the tax year must total 14 or fewer, you or a family member must have used the unit or area for personal purposes for at least 14 days, and the rental expenses are not deductible. If all of these criteria are met, the income does not even need to be reported on your tax return. However, you should be careful – once there is a 15th day of rental, this exception no longer applies at all. You’d need to report all 15 days of rental income to the IRS.
If you rent out your home for 15 days or more, your deduction for rental expenses may be limited. Most traditional landlords rent out property that they don’t use for personal purposes, and they are often are able to deduct the full amount of their rental expenses, even if those expenses exceed the rental income for the year. However, if you are renting out your home, the deductibility of your rental expenses may be limited. The unit or area you rent out is considered a home if you or a family member used the unit or area for personal purposes for at least 14 days or 10% of the days it was rented out, whichever is greater. If the rental is considered a home or part of your home, your rental expenses are only deductible up to the amount of your rental income. Any excess expenses can be carried over to future years.
If you provide particular types of services to your renters, your rental may be considered a business. Most traditional landlords are fairly hands-off in their management of their properties – for example, they don’t clean their units, do the renters’ laundry, or cook meals for the renters. As a result, their rental isn’t considered a “business” by the IRS – it’s an “investment”. These rentals are thus reported on Schedule E, rather than Schedule C, and are not subject to self-employment tax. However, many AirBNB users do provide these nontraditional services to their renters. If you cook, clean, or perform other nontraditional landlord services for your renter, the IRS considers your activity a business, and thus it needs to be reported on Schedule C and reported as self-employment income. Services such as utilities, cleaning common areas (rather than rental areas), or trash pickup are not considered nontraditional services.
If your renters' average stay during the year is 7 days or less, it is considered a business. Most AirBNB rentals are for very short periods, so the IRS's 7-day rule for rental properties is a very important one to be aware of. The rule works like this: total up the number of total rent arrangements you had during the year (if previous renter(s) rent it again later, nonconsecutively, each is counted as a separate arrangement). Then total up the number of rental days during the year. Finally, divide the number of rental days by the number of rental arrangements. If the result is 7 or less, the IRS does not consider it a rental, and thus it will need to be reported on Schedule C, regardless of the level of services provided.
The tax statements you receive from AirBNB or similar entities may not accurately reflect the income you actually received from them. AirBNB payments are generally made by credit card, and the IRS requires processors of large amounts of credit card transactions to issue Form 1099-K to payees. However, the IRS also requires that this Form 1099-K must report the gross amount processed for the payee during the year, not the net amount. As a result, when you receive a 1099-K from AirBNB, the amount reported as income to you on the Form 1099-K will also include amounts that you did not ultimately receive, such as AirBNB’s host fees charged to you, disputed credit card charges, and refunds. These fees, disputed charges, and refunds may be deductible on your tax return, even if they aren’t adjusted for on the 1099-K.
These are just a few of the tax issues that AirBNB users should be aware of, and as these examples show, the tax answers are not always obvious or clear-cut. If you need tax advice regarding your specific rental property, you should contact an Atlanta tax accountant.
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