AirBnB & VRBO Change the Rental Game
If you own a property and you rent it out on Airbnb or VRBO, then you may be subject to some highly specific tax rules. These rules apply whether the property is a first or second home, and are dependent upon factors such as the aggregate length of time that the property is rented out throughout the year, whether you provide special services along with the rental fee, and even whether you make use of a service that matches you as the property owner with potential renters.
It is important that you are familiar with these rules and have a good understanding of them, as they can have significant repercussions, including making the rent you charge tax free or — by contrast — meaning that you need to use a Schedule C to report your income and expenses rather than the traditional use of Schedule E. Below you will find a summary of the tax rules that those offering short-term rentals need to know. A note of warning - many of them are complex and difficult to understand.
Total Annual Rentals of Two Weeks or Less
If the total amount of time that your property is rented out during the year falls below fifteen days, then you are not required to report the income. On the flipside, even if you incurred expenses for the rental, you are not permitted to deduct them. You are required to submit your property taxes and interest in full – no prorating is permitted — and the same is true for itemizing your deduction: you can use Schedule A to take the full deduction for your mortgage interest paid and property taxes paid.
Is it A Business or Not?
In many cases, income from a rental property is not considered a business and does not need to be reported as such because it is viewed as a passive activity. There are two specific scenarios in which this is not the case, and where the income is treated as business income. These two instances are when the average rental period is a week or less, or a month or less if significant personal services are offered by the owner or their agent as part of the longer rental; and when no matter what the average rental period is, the owner or their agent provides these same types of personal services.
Personal services are defined in IRS Publication 527 as “substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service.” In these cases, the income and expenses are treated as being derived from a business or trade. They are to be reported on Schedule C, as are any prorated interest and taxes. It is important to note that basic maintenance services such as trash collection and utilities such as light or heat do not fall under the category of personal services.
There is one exception to this rule, and that is where the cost of the services comes to less than ten percent of the rental fee. When these expenses are that low, then they are considered not to be significant enough or extraordinary enough to qualify for the 30-day rule, even when the services provided include both public area cleaning and trash collection as well as maid and linen services, such as would be seen in a high-grade commercial or residential real property available for long-term rental.
How to Address Profits and Losses?
When profits from a rental are reported as a business revenue, they may be subject to self-employment tax. This is specifically true when it is reported as a business on Schedule C. Losses, by contrast, continue to be treated as a passive-activity loss regardless of how income is reported up until the point that the business involves 500 or more hours of personal services per year. Accordingly, these losses are restricted to the passive income amount. Overages can be applied to future rental years. This rule also applies to real estate professionals.
There is an additional caveat to this rule that allows a business loss of up to $25,000 to be taken, though this special allowance is not permitted if the activity is reported on Schedule C, and it phases out for those whose adjusted gross income falls between $100,000 and $150,000.
Call Our Office for A Closer Analysis
These rules can be quite difficult to understand and apply to your individual situation. For assistance determining how best to report income, profits and losses, contact our office today and set up an appointment aimed at minimizing the amount of tax that you owe and making sure that you are filing all revenue and expenses appropriately.
If you are renting out a portion of your home, make sure you understand the tax consequences.
Our office will be happy to review the options and identify the method that works best for you. Call (909) 939-6034 to make an appointment!