Income earned by renting out a house or a room through Airbnb is taxable. So we need to report that on the annual tax return. And against this rental income, Airbnb hosts can deduct expenses that are related to the rental activity.
Airbnb hosts need to know about the special rules regarding what they can deduct, how to handle situations where the house is being used only partly as a rental, and a whole host of other situations that come up with short-term rentals. This article discusses 9 of the most common questions that come up.
- What kinds of expenses can be deducted?
- What if my Airbnb property is in a different city? Can deduct travel expenses?
- What if I’m renting out part of my house
- What if the house is rented out only part of the time?
- What if I rent the house out only a few days during the year?
- What sort of tax documents will I get?
- What do I need to know about local taxes (sales tax, transient occupancy taxes, hotel taxes)?
- What do I need to keep track of?
- What if the rental activity is losing money?
- What sort of strategies will help me save money on my taxes?
What Kinds of Expenses Can Be Deducted?
Airbnb hosts can deduct expenses related to the rental activity.
For example, they deduct the commissions and fees charged by Airbnb.
They can also deduct the cost of furnishing the rental: the bed and mattress; the nightstand and chest of drawers; the lamps, linens and curtains; and the pots and pans and dishes.
Airbnb hosts also deduct part of the costs for owning and maintaining the house. Not all of the costs, mind you; just the costs that can be allocated to the rental unit. The area of the rental unit divided by the area of the whole house (measured in square feet) gives us a rental percentage of the property. We use this percentage to find the portion of expenses related to the rental for things like homeowner’s insurance, property taxes, mortgage interest, utilities, trash, internet service, cable and streaming television service, and other expenses that relate to the entire house.
One of the biggest rental deductions Airbnb hosts is for depreciation. Conceptually, depreciation is the cost to buy, build or improve the home. This cost is spread out over a period of 27 and a half years. We don’t take the entire cost of the house as depreciation. Instead take the original purchase price of the home and divide it up into component parts. One part is for the cost of the land: this part cannot be depreciated. The remainder of the purchase price is the cost related to the building and improvements. We take this building portion and find the part related to the rental unit. It’s this rental portion of the cost that we take as a depreciation deduction spread out over twenty-seven-and-a-half years.
If My Airbnb Property is Located in a Different City, Can I Deduct Travel Expenses?
Generally speaking, yes. Airbnb hosts can deduct travel to and from their rental property if the main purpose of the trip is to collect rental income or to manage, conserve, or maintain the rental property. But we also need to be reasonable here. If the trip is partly to manage the property and partly to take a vacation, we will need to allocate the expenses between personal and rental activities.
For example, Gary lives and works in Oakland, California, and owns a house up on the Mendocino coast. His property is rented out most weekends and holidays. Because his house is so far away, he hired maids to clean the house after each guest leaves. (Housekeeping is also a deductible expense.) He drives up to the property at least once a month to inspect the property, do any repairs, and work in the garden. Because his travel is related to managing the property, we can deduct the car expenses. In Gary’s case, he keeps a log of each trip, and we claim the standard mileage rate for the number of miles he drives back and forth.
The same thing holds true if the property is even farther away. Etta and Lucy own a house down in Palm Springs, California. Instead of driving, they fly down to Palm Springs every 3 months from their home in Seattle. They deduct their airfare and car rental.
What if I Rent out Part of My House and Live in the Other Part of the House?
In this situation, we need to measure the square footage of the rental unit and compare it to the total area of the house. We use this ratio to allocate to the rental activity any expenses that are related to the whole house.
For example, Jon and Kerri have a garden cottage behind their house. The cottage is used only as a rental unit. When it’s not being rented, the cottage sits vacant. Based on measurements of square feet, the cottage represents one-third of the total property. In this situation, we allocate one-third of expenses that apply to the whole house — such as insurance, property tax, mortgage insurance and utilities — to the rental activity.
But What if My House is Rented Out Only Part of the Time?
Here’s where it starts getting tricky. We need to ask more questions to understand the situation.
What happens when the property isn’t rented out? Does it sit vacant? Do you go in to make repairs and to clean things up? Are you and your family using the property personally?
The answers to these questions help us determine how to allocate expenses to the rental activity.
Special rules come into play that limit rental expenses when someone uses their rental unit for more than 14 days or more than 10% of rental days during the year.
Rental days are just what you expect: these are the number of days you rented out the unit or property. Personal use days are days when you or your family are using the unit or the property for a non-rental purpose. Days spent repairing or maintaining the property do not count as personal use days.
Here are two common scenarios that illustrate what’s going on.
Scenario 1. Minimal personal use days.
Genevieve lives in Portland and owns a second house in the Oregon coast. Last year, the coastal house was rented out for 130 days. She drives out to the house once a month to clean things up and perform routine maintenance. She and her family stay at the property during the holidays, for a total of 10 days of personal use. The rest of the time, the coastal house sits vacant.
In this scenario, all expenses for the house are deductible against the rental income. Even though the house is rented out only part of the time, Genevieve’s personal use falls below the threshold of 14 days or 10% of rental days. As such, we don’t need to make any adjustments in how we calculate deductions against the rental income.
Scenario 2. Mixed use property.
Mariah rents out part of her two-story house on Airbnb. She lives on the second floor and rents out the in-law unit on the ground floor. Whenever the in-law unit is vacant, Mariah’s children use the unit as a quiet place to do their schoolwork or practice their musical instruments. Looking back over the past year, there were 130 days of rental use and 235 days of personal use.
In this second scenario, the rental portion of expenses related to the entire house will be quite limited. That’s because Mariah and her family use the in-law unit most of the time as part of their home. Mariah will be able to deduct in full any expenses directly related to the rental activity — such as the commissions and fees charged by Airbnb, or repairs made only to the rental unit. The rental portion of other expenses that relate to the whole house — such as utilities or insurance — will be limited.
What if I Rent out My House Only a Few Days a Year?
If you rent out your house less than 15 days during the year (and you use the property as your home the rest of the year), then you don’t need to report the rental income. The rental income is completely tax-free in this situation. We would deduct expenses for property tax and mortgage interest as an itemized deduction, and we would not allocate any expenses to the rental activity.
What Sort of Tax Documents Will I Get from Airbnb?
Airbnb provides their hosts with a Form 1099-K.
Hosts can also download an earnings summary from the transaction history section of the Airbnb dashboard.
Beware of State and Local Taxes
Hosts might need to collect transient occupancy taxes from their guests. A transient occupancy tax is like a sales tax. The tax is charged to the guests and then paid over to the county where the property is located. It might be called a hotel tax or transient accommodations tax.
Airbnb might not collect their tax for you. You can check whether Airbnb collects this tax from your guests by drilling down to the location settings under Manage Listing in the Airbnb dashboard. At present, Airbnb collect hotel taxes only in a few U.S. and some foreign locations.
Some counties have developed policies exempting small operators from the burden of collecting transient occupancy tax. But other counties track down Airbnb hosts who haven’t been collecting transient occupancy taxes.
We advise Airbnb hosts to inquire into the rules regarding sales tax and transient occupancy taxes in the city, county and state where their property is located.
What Airbnb Hosts Need to Keep Track of
Airbnb hosts need to track all items of income and expense related to their rental activity, as well as all rental assets, the number of days rented out, and the number of days of personal use.
Hosts should also keep any tax documents related to her property. This would include property tax statements, Form 1099-MISC or Form 1099-K from Airbnb and other rental listing sites, Form 1098 showing interest paid on her mortgage, and any sales tax or transient occupancy tax returns.
What if the Rental Activity Loses Money?
There is a special rule that applies to rental losses. It’s called the passive activity loss limitations. Under these passive loss rules, rental losses on one property offset profits on another rental property. If there’s a net loss across all rental properties for the year, then this net loss carries over to the following year, where it can potentially offset that next year’s positive rental income.
Example. In 2015, the first year Jenny rented out the downstairs unit, she had a rental loss of $1,000. Since she did not have any other rental properties, this loss carried over to 2016. In that year (2016), she had a rental loss of $500. So now she has an accumulated loss of $1,500 carrying over to 2017. In 2017, Jenny turned a profit of $5,500. Good for her! On her 2017 tax return, we applied the carry-over passive loss of $1,500, which reduced her rental profit from $5,500 to $4,000. This $4,000 amount was the amount of rental income Jenny paid tax on in 2017.
TL;DR Tax Takeaways
- Income generated by renting out your house is taxable.
- We report total rental income minus related expenses.
- The net income is combined with the other earned income and taxed at ordinary rates.
- Special rules apply if the net amount is a loss.
- You may need to collect sales tax or transient occupancy tax from your guests and remit those funds to your state or county.
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