Do You Airbnb? The Lowdown on Taxes and Short-Term Rental Income

By Gary Kaplan

Are you looking for ways to make a few extra dollars? If so, you aren’t alone. Airbnb and other short term rentals are gaining in popularity because of the win-win situation that they offer. Homeowners get to earn extra money from their residence while travelers can find comfortable homelike lodging for a bargain.

However, this is not entirely free income for homeowners. A short-term rental, like all other types of rental, can be taxable income in some circumstances.

The IRS View of a Short-Term Rental

Have you planned to take taxes out of your vacation rental profits? If not, you may be in for an unpleasant surprise in April. The government likes to take its cut of any income we make; short-term property rentals are no exception. When you list your spare bedroom or even a hammock in your yard on popular rental sites, you have become self-employed in the eyes of the law. Any income from these activities is subject to the same taxes you would pay if you were running a business.

This income can add heavily to your tax bill; however, if you play your cards right it may actually reduce your overall tax liability. Short-term rentals offer an additional way to write off certain housing expenses while making extra income on your home.

What Types of Short-Term or Vacation Rental Income Are Taxable?

In theory, almost all income gained from your Airbnb or other rental listing is taxable. If you rent your home for more than 15 days every year, even when they are not consecutive, your rental income will need to be reported on your individual tax return as self-employment income. You will need to pay not just income taxes but also a self-employment tax on this income. If your earnings are sizeable, you may even have to pay estimated quarterly taxes every three months.

Regardless of the amount you earn, there will be a few extra forms to fill out as part of your taxes. If you rent out space in your residence for fifteen or more days a year, you will need to fill out a Schedule C and possible other additional paperwork. These taxes can be sizeable, which is why it is so important to take all of the write-offs available and to talk to your accountant if you fear excessive tax liability.

Why is 15 days the magic number? The IRS Section 280A says that you do not need to pay income taxes on rental income when this income came from a home that you reside in, and when this space is rented for less than 15 days every year.

To muddy the waters further, the definition of what constitutes your residence is counterintuitive. You are considered the resident of a home where you live for more than fourteen days, or 10% of the days that you rent it out—whichever is greater.

This may lead many to wonder if they can hop between two homes while renting them out alternately at steeper short-term prices. It is highly unwise in most situations to try to claim more than one home as a residence, so ask an accountant before going this route.

Tax Breaks for Small-Time Landlords

You may be anxious at the idea of doing extra tax paperwork; however, this paperwork can save you a great deal of money if you play your cards right. There are ways that you can offset the income to declare as little as possible. Renting out a room usually means that you will be paying higher costs for utilities and repairs, so these can be written off.

In addition, other expenses such as supplies (which includes furniture used primarily by rental guests) and cleaning expenses can be deducted. You can also take many of the same tax breaks as long-term landlords, which include mortgage interest and property taxes. Your home may become not just a haven from the outside world, but also a way to save a little of the money you would otherwise pay in taxes.

There is a great deal of math that goes into determining exactly how much of these expenses is deductible. In general, you divide the number of days that the unit is rented every year by the number of days in a year to find the proportion of each bill that can be deductible; multiply the resulting decimal number with the amount of your home expenses to find out how much can be written off.

This is not a task for the uninitiated! Being a successful business owner means doing extra math and getting the help of experts, including a good business accountant. If you qualify for small business taxes as a result of your rental income, it is important to ensure that your tax burden is as low as possible so you can keep most of your hard-earned income.

Good Records Make Good Business

Because the IRS will consider you a small business owner once you list your rental, it is important to keep good records. Some short-term or vacation rental registries, such as AirBnB, will keep records for you, streamlining the processes. Unfortunately these websites also tend to report all income to the IRS, even income that does not qualify for taxes. Even if you rent out your sofa for fourteen or less days, you may get a letter from the IRS asking for clarification.

If this happens, you will be happy (and likely protected from the dreaded audit) if you kept all of the appropriate records. In addition to recording all income and the dates when your home was rented, it is important to record all expenses and save receipts for those expenses you hope to write off. Remaining organized will make your life easier when you file taxes; it will also give you peace of mind knowing you can survive any extra attention from the IRS.

Turning part of your home into a miniature bed and breakfast is a great way to make extra money while meeting new and interesting travelers. Airbnb is just one of many sites making it easy to open your own lucrative “small business” without coming up with a new widget or business plan. It is important to handle the taxes carefully so you pay what you need to—and not a penny more.

About the Author

Post by: Gary Kaplan

Gary Kaplan’s desire for excellence shows in his training, experience, and service he provides as a top rated Boca Raton CPA. He completed his undergraduate degree at Nova Southeastern University. He went on to earn both his Masters in Accounting at Nova Southeastern University and his Masters in the Science of Taxation at Florida International University. Gary has been practicing as a Certified Public Accountant since 1997, attaining his expertise in all aspects of accounting, business, and personal tax and strategic planning. He listens to each client and helps them achieve their own, unique goals. Gary values educating others and giving back to his community: He has served as an Adjunct Professor of Accounting at Florida Atlantic University, and gives accounting presentations at St. Thomas University School of Law. In 2013, Gary Kaplan received his certification for retirement planning and is now a Certified Specialist in Retirement Planning™ (CSRP).

Company: Gary M. Kaplan, C.P.A., P.A.
Website: www.gkaplancpa.com
Connect with me on Facebook, LinkedIn, and Google+.

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