Planning to rent out part of your home? You may owe more income tax.
Renting out a room in your main home for a week or two is a great way to earn some extra money, but it may affect the amount of income tax you owe for the year. Below is some general information to help you understand how short-term rentals change your tax liability.
Tax-Free Short-Term Rental Income
If you rent out any amount of space in your home for 14 days or less, you won't need to pay any income tax on the rental payments you receive, as long as you live in the house yourself for at least 10 percent of the time you rent the home to others during the year. In this case, it doesn't matter how many people stay in the space while it is rented or how much money you make from the venture.
However, if you rent space in your home to a tenant for 15 days or more, this exemption will not apply. Furthermore, if you are able to claim this exemption, you won't be able to report any rental deductions for that period, but you can continue to deduct the full amount of home property taxes and allowable home mortgage interest on your schedule A without any adjustment for the period rented.
Renting for 15 Days or More
If you rent any space in your home for 15 days or more, the income you earn will not be exempt from taxation. You must report all of this income, including the amount you earned during the first 14 days you rented the home, on your tax return for the year. You will be able to deduct any direct rental expenses you paid from this income, including credit checks, cleaning expenses, money paid to your rental agency and any repairs made only to the rental portion of the home. You can also deduct a portion of other indirect costs you paid during the year that are attributable to the portion of the home rented and the period of time it was rented or available for rent, such as your property taxes, mortgage interest and utilities
Keep in mind that companies like FlipKey and Airbnb may report the income you earned to the IRS even if you rented out your home for 14 days or less. In this case, it is up to you to prove that the income isn't taxable.
In most cases, renting out your home on a short-term basis won't require you to pay self-employment taxes. However, if you have a portion of your home that is always used as a rental and you provide certain services to your guests, such as maid service, you may be required to report rental payments as business income. To avoid this issue, don't provide extra services to your guests and consider charging a separate fee to clean the space after guests have left.
Remember to keep careful records of all of your rental income and expenses during the year so that you can file your taxes accurately. Keep these records even after you have filed in case of an audit.