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.
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. 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.
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
There are two methods of allocating expenses for both rental and personal use: the “Tax Court” method and the “IRS method”. Under the Tax Court method expenses are prorated using the ratio of the number of days rented to the number of days owned. IRS method uses the ratio of the number of rental days to the sum of personal-use and rental-use days to prorate the expenses. The method chosen may make a large difference on your return.
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. If you have any more questions, feel free to email us at taxquestions@universaltaxservices.com.
