Airbnb Tax Reporting

Written by: Josh Katz, CPA

Ever since the launch of Airbnb in 2008, the company has been used by ever increasing travelers to find suitable accommodations even in the remotest part of the world. For savvy travelers it is a platform to find an alternative place to stay. However, the property renters find themselves in a maze of complicated tax implications. Every year Airbnb reports to IRS the rental payments sent to their hosts and reminds the hosts to fill out the tax information. So there is no way of evading those taxes. But there is more to it than that.

At Universal Tax Professionals, our dedicated team of international accountants specializes in properly reporting Airbnb income on your tax filing. Our expertise can assist you in comprehending the necessary disclosures and guide you in optimizing tax credits and deductions to reduce your overall tax obligations. Additionally, we provide a range of US expat tax services that cater to the needs of American expatriates seeking assistance with their US expat tax obligations.

What is Airbnb Tax Reporting?

Essentially, Airbnb Tax Reporting refers to the process of accurately documenting your rental income to tax authorities. This includes income earned from renting out your property on Airbnb, as well as any associated expenses that may be eligible for deductions.

One of the fundamental aspects of Airbnb tax reporting is determining what constitutes taxable income. Your Airbnb income is considered taxable and must be reported, whether you’re renting out a spare room, a vacation home, or an investment property. This encompasses not only the rental fees charged to guests but also any additional services or fees, such as cleaning or pet fees.

If you are renting out your home for less than 14 days, you do not have to pay any taxes on it. However, if it is a second home then in addition to the 14-day restrictions you need to also stay there for more  than 14 days to be eligible for the tax exemption.

Additional Schedules for Airbnb Tax Reporting

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If you are renting your personal residence for more than 14 days, then the rental income and expenses must be reported in IRS Schedule E and the personal expenses in Schedule A. If the rental expenses exceed the income it cannot be reported as a loss but can only be deducted from future years’ rental income. In short, if you are renting a property for less than 14 days and live in it for more than 14 days you do not have to report it to the IRS. However, because Airbnb sends 1099 forms to IRS, renters are advised to keep records of the rental agreements.

Airbnb Tax Reporting

For tax purposes, two broad distinctions have to be made. One is personal versus rental use, and the other is direct versus general expenses. This is because direct rental expenses are 100% deductible, but general expenses such as mortgage interest are deductible on a pro rata basis. As for the former distinction, any day the property is rented at a fair market value (FMV) it is considered a rental use. If you are renting a single room in your primary residence or renting it out to your friends and family at a rate less than the FMV, it is considered as personal use. The idea of using FMV is to prove that you have a profit-seeking motive.

Rental vs. Personal Use

As a diligent Airbnb host, it’s crucial to navigate the intricacies of tax reporting. One significant consideration is how you account for both rental and personal use of your property. There are two primary methods used to calculate your tax liability: the Airbnb “Tax Court” Method and the “IRS Method”. Each approach offers distinct advantages and considerations when it comes to reporting income from both rental and personal use.

The Tax Court Method

The Airbnb Tax Court Method is a unique approach recognized by the US Tax Court. It allows hosts to allocate expenses based on actual usage, dividing them between rental and personal use. This method hinges on accurate record-keeping and meticulous documentation.

Rental Use Allocation

Under this method, expenses directly related to rental activity are deductible. This encompasses costs like advertising, cleaning fees, maintenance, and any other expenses incurred while accommodating guests.

Personal Use Allocation

The Airbnb Tax Court Method also acknowledges the periods when the property is used for personal reasons. During these times, expenses related to the property, such as mortgage interest and property taxes, cannot be deducted. However, hosts can still claim expenses associated with maintaining the property’s overall condition.

The IRS Method

In contrast, the IRS Method is a more straightforward approach that divides expenses between rental and personal use based on a fixed formula. This method is outlined in IRS Publication 527 and is often preferred for its simplicity and ease of application.

Rental Use Allocation

According to the IRS Method, if you rent out your property for fewer than 15 days in a year, you are not required to report the income, and no expenses are deductible. This is known as the “Masters Rule” and is particularly advantageous for hosts with occasional rentals.

Personal Use Allocation

For properties rented for more than 14 days or used personally for more than 10% of the total rental days, expenses must be prorated based on the number of days the property was used for rental versus personal purposes.

Service Tax on Rental Services

In some cases, if you are renting out a portion of your residence or some number of rooms with services such as cleaning, breakfasts and laundry then it is considered as either bed and breakfast or a hotel for tax purposes. In such cases rental income and expenses would be reported in IRS Schedule C. You would also end up paying both federal income and self-employment taxes.  A way out of it is simply not to provide them those extra services.

The above tax rules apply to timeshares as well in the same manner. Airbnb does not offer personalized tax advice. Perhaps it should as an additional service for a minimal fee. But they highly encourage renters to consult a tax professional to cut through the labyrinth of rules and regulations.