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Special Tax Rules if You're Renting Your House via AirBnB

by
Bob Mason
on
9/27/2016
Special Tax Rules if You're Renting Your House via AirBnB

Whether you own your home plus a vacation home, or just your primary residence, there's no question that there is money to be made by renting via AirBnb, HomeAway, VRBO, and other online rental services. You can also hire a real live rental agent to make your property available for rental. But if you're thinking of doing this, it is important for you to realize that you can't just pocket the money and walk away.

When you rent out a property that you own for periods that are 30 days or less, there are special tax rules that apply. You need to familiarize yourself with these rules before proceeding, because some of them will work to your advantage, and some won't, depending upon your individual circumstances. 

Special Tax Rules for Rentals

The tax rules that apply to rentals can be complicated, so it's a good idea to take the time to figure them out before you start listing your property as available. In some cases, you'll be able to charge rent without having to pay any taxes at all. In other situations, you'll have to pay tax and report it as rental activity on a Schedule E on your tax return. In still other instances, you'll be required to prepare a Schedule C tax form as if you're running a business.

Making your property available for others to use for a short period of time can definitely mean more cash in your pocket and be a good way to defray your ownership expenses – just make sure that you're following the rules as outlined below.

Less Than 15 Days of Rental per Year: If you want to make a little bit of money from your property without having to worry about reporting taxes on the income, then keep your rental activity to under 15 days per year. When you do this, you don't need to prorate your interest and property taxes, and you don't deduct any expenses that you incur as a course of renting the property out. You just take your itemized deductions on your Schedule A in the same way that you always do, including your property taxes and your qualified mortgage interest.

Passive vs Active Activities and the 7-day and 30-day Rules: In most cases the IRS views renting a property out as a passive activity. However, when an owner rents their property out for seven days or fewer, or for 30 days or fewer while providing significant personal services, then the service that is being provided is considered a trade or business. That means that the owner needs to use Schedule C to report all income and expenses, and to prorate taxes and interest paid on it accordingly.

The same is true if the owner provides what is termed extraordinary personal services, regardless of how long the property is rented out to a client. Extraordinary personal services include things like changing the sheets and towels, or providing maid service. They do not include basis such as maintaining public areas or providing light and heat, trash collection services, and the like.

Exception to the 30-Day Rule: Though under the 30-day rule, maid service or linen service is viewed as extraordinary, there is an exception to this rule if the service that is provided is in keeping with what other high-grade commercial or residential properties provide as long as the cost of the services provided is less than one tenth of what is being charged for the rent itself. In cases such as these, the services are not considered to be extraordinary.

Profits & Losses on Schedule C: Many people are unclear as to whether they need to report rental profit as a form of self-employment, and therefore need to pay self-employment tax on it. If the income is viewed as rental income, then there is no requirement that self-employment tax be paid. However, if the rental activity requires the filing of Schedule C, then the income is viewed as business income and it does require paying self-employment tax. As for losses, they are considered a passive activity loss, and are deductible up to a point. Losses that are not used in one tax year can be carried over to the next year until they are gone.

The only exceptions to this are where the owner is qualified as a real estate professional or they provide 500 or more hours engaged in the rental activity. If this is the case then they meet the material participation test and the losses are considered to be active. In this instance, a special rule for real estate rental activities applies, and allows up to $25,000 in losses to be written off. For those whose modified adjusted gross income falls between $100K and $150K, this write-off capability phases out, and for those who report using Schedule C, it is disallowed entirely. 

Understanding the tax ramifications of renting out your personal property can be complicated. If you are considering renting out your home or second home, it's a good idea to give us a call to make sure that you are doing so in a way that provides you with the greatest income and tax benefits.

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Bob Mason

Bob Mason

Bob Mason is the founder of Coast Financial Services Inc. servicing both the Santa Cruz, and San Jose areas. Bob Mason is a skilled financial professional who is fully equipped to assist any of your accounting needs. Founding his firm in Santa Cruz, Bob understands the importance of small businesses and how they form the backbone of the area. Coast Financial Services, Inc. has been dedicated to the growth and profitability of businesses in Santa Cruz for 17 years. To learn more about Bob Mason and the rest of his team, visit their website.

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