Do you have to pay tax on short-term rental income?
Some Airbnb or VRBO income may be exempt from federal tax, but that may not apply to state and local taxes. Although tempting, hosts looking to subsidize a vacation by renting a home while traveling need to first understand the tax and insurance issues that can arise when you rent your home.
Even Tax-free Rentals on Airbnb Carry Tax and Insurance Issues for Hosts
Even if a weekend rental ends up being federal income tax-free, hosts may still need to collect and remit state and local taxes. Airbnb has made efforts to simplify tax and insurance issues by automatically collecting taxes in certain instances and recently providing primary insurance coverage for hosts, but make no mistake; the homeowner is ultimately responsible for their tax liability and ensuring no gaps in insurance coverage.
How to determine if your rental income is taxable
Renting your main residence will provide additional income; however, it may not be tax-free. Rental income may be subject to federal and state income taxes, depending in large part on how many days the property is rented. Airbnb will produce a 1099-K with your total rental income for the year, which will be used in filing your federal income tax return. For local taxes, Airbnb may collect and remit hotel, lodging, or sales taxes automatically on your behalf in certain areas, but this service is not offered everywhere. Other rental websites, like HomeAway and VRBO, may not offer this service at all.
Although state and local taxes are usually paid by the guest, it is the responsibility of the host to determine whether the tax applies and to ensure the proper amount is remitted to the government. Some states may even require you to register as a business, so be sure to investigate how your tax jurisdiction treats rentals. The laws that apply to vacation rentals are complicated, and it is your responsibility (not the rental website) to fully understand them to comply with state and federal regulations.
Rentals 14 days or less
IRS allows you to rent your property tax-free for 14 days or less every year. This means that as long as you rent the property for two weeks or less, you will not be subjected to paying federal income tax on the rental income, regardless of the income generated. These tax-free rentals do not allow the homeowner to “double-dip” and also deduct expenses related to the rental, which is often allowed when there is taxable rental income.
Keep in mind that state and local tax laws are not necessarily the same as federal regulations. Even if you rent a property for 14 days or less, the transaction may still be subject to hotel, occupancy, or sales tax as explained earlier.
Rentals more than 14 days
Although the tax code is very complex, at a high level, if you rent out your primary residence (or a portion of it) for more than 14 days, your rental income will be included in your taxable income. In this scenario, expenses are deductible, which can help offset your tax liability.
Expense deductions are explained below.
Direct Rental Expenses
The IRS provides guidelines for what can be legitimately deducted for rental-related expenses. For example, all costs directly having to do with the rental process are 100% tax-deductible. Some examples of direct rental expenses are rental agency costs and commissions, costs to advertise the property, repairs and depreciation for the rental portion, and cleaning costs.
Indirect Rental Expenses
You are permitted to deduct a fraction of total expenses related to the property based on the percentage of rental use to total use. For example, if you rented your home for 20 days in a year and used the home for 150 days, the proportion of indirect rental expenses you could deduct would be 20/170, or 12%.
Indirect rental expenses include general repairs, maintenance and gardening, cleaning, Internet, as well as mortgage interest, taxes and insurance for your home. Indirect rental expenses are costs you would have incurred regardless of whether the property was rented out or not.
Deductions cannot create a loss for properties considered a residence
If a home is rented more than 14 days, where personal use of the property exceeds the greater of 14 days or 10% of rental days, the unit is considered a primary residence for federal tax purposes. In this case, the IRS allows both direct and indirect expense deductions up to the total sum of the rental income; or in other words, you cannot use these expenses to create a loss.
Should qualified expense deductions exceed rental income; the loss can be carried over and applied to income taxes in subsequent years, assuming there is taxable rental income in a future year to which the loss (or a portion of it) can be applied. It is important to consider whether the expected rental income is likely to push you into a higher tax bracket. In that situation, it could be advisable not to rent the property. Consult with a CPA if you are unsure what the implications will be on your entire tax picture.
(Note: properties rented for more than 14 days where personal use does not meet the criteria of a residence above may be able to deduct expenses in excess of income, subject to passive activity loss rules.)
In October 2015, Airbnb began providing Host Protection Insurance which acts as primary insurance up to $1,000,000 for third party bodily injury or property damage claims. Airbnb also provides a separate $1,000,000 Host Guarantee, which covers certain personal property damage as a result of a guest stay. The Host Guarantee is not insurance though, and isn’t a substitute for homeowners or renters insurance.
Although adding Host Protection Insurance as primary coverage is a step in the right direction, coverage is typically more limited than a homeowners policy would be. Be sure to speak with your insurance agent before renting the property, as your policy may deem rentals a business activity, and exclude it from coverage.
This article is for informational purposes only and should not be misconstrued as the rendering of personalized tax, accounting, legal, investment, or financial advice.