Air BnB – How is it taxed?
In my last post, I talked about the tax ramifications of the rapidly booming shared economy phenom, Uber. The IRS has taken notice and is beginning to crack down on those involved with making money from the shared economy. Today, we will move to the vacation rental sector of the shared economy. The biggest player here is Air BnB, followed by other services such as VRBO, Home Away, and FlipKey. So how does it work? Let’s say you want to take a trip to Florida for a week of vacation…If you either feel that hotels are too expensive, or you don’t like the overall feel of hotels, you would opt for the shared economy option. Hosts list their homes or apartments on the website with the price per day, location, # of rooms and pictures. If you think it looks like a place you would like to stay, you pay them via the website and receive instructions from there.
So, if you are a host receiving money for visitors to stay at your house…how are you taxed?
- The most important factor to consider is the 14 day rule. If you rent the property out for 14 days or less, the income you receive is not taxable. Money that isn’t taxed?! I’m not crazy, this is a thing. I actually had a friend/client avoid having to pay tax on the money he earned through Air BnB by having him stop renting the place out at 14 days. You will still receive a 1099 from Air BnB showing the income that they paid you for the year. You DO need to report this on your tax return. You are able to post an adjustment on your tax return stating that you qualify for the 14 day rule to cancel out this income. It is important that you keep diligent records of the number of days that your place is rented out by visitors in case it is ever put in question. Air BnB usually does a good job of doing this for you, but keep your own records as well to be safe.
- What happens if you rent out your home for more than 14 days? Now you will need to pay taxes on the income that you have brought in. This income will be reported on the Schedule C, NOT the Schedule E. The IRS considers this income to be a self employed business and not a rental property. The fact that you are providing bookings, amenities and other hospitality services makes you a business owner and not a landlord.
- So, now that you are running a business, what can you deduct? In order to reduce your tax liability, you need to track possible deductions to offset some of your income. First, keep track of any amenities that you provide visitors. If you purchase new bed sheets, towels, linens etc. for new visitors, these costs can be deducted. Also, if you are a gracious host and provide your visitors with food and beverages, these can be deducted as well. Next, you will be able to use a portion of your real estate taxes, mortgage interest, and utility bills. Take the total number of days your place was rented and divide that by 365 days. Whatever percentage you come out with, that is the percentage of your taxes, interest and utilities that you can deduct from your business income on the Schedule C. The remaining amount of the real estate taxes and mortgage interest will be part of your itemized deductions on your Schedule A. It is important to know that you can not take the full amount on Schedule A and still use your percentage on Schedule C. Also, if you only rent out a single room in your house, then you will need to use the percentage of the total square footage of that room compared to the total area of the house. Any service fees that Air BnB assesses to you can also be deducted.
- Occupancy Tax may be coming… Many hotel and lodging operators have put in complaints that they have to pay occupancy taxes when they have visitors, but Air BnB hosts do not pay these taxes. Many states are in the process of enforcing occupancy tax on the shared economy hosts. If this goes into effect in your state, you will need to charge your visitor an occupancy tax and then pay that amount to the government.
Like Uber drivers, many times Air BnB hosts do not realize that they may have become a business owner overnight. It is important to educate yourself on how you will now be treated under the tax code. I was able to save my friend a couple hundred dollars in taxes by making him aware of the 14 day rule. If you currently rent out your place through the shared economy, or are considering doing so for a big upcoming event, please consult with a tax professional to keep yourself educated and compliant. We can help with the tax preparation and tax planning of taxpayers involved in the shared economy.
The Milwaukee and Waukesha County areas are in high demand during events such as Summerfest, State Fair, and various sporting events. It is a good opportunity to put some extra cash in your pocket, but be aware of how it could affect you at tax time. Plan now before it is too late! Hammernik and Associates specializes in helping Milwaukee, Waukesha, Brookfield, New Berlin, Wauwatosa with Air BnB tax preparation and tax planning.
Next week, the final segment of the shared economy industry will focus on the online retail sector.
Nicholas Hammernik, EA