Tax Tips For AirBnB Hosts: Part 1

 

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The peer-to-peer or “sharing” economy has made it easier for individuals to pick up some extra cash. One of the most popular peer-to-peer platforms is Airbnb. Guests get to stay in a private home anywhere in the world, and hosts reap the benefits of the extra income.

If you’re considering renting out your home to Airbnb guests, there are some tax implications to be  aware of before diving into your host role. Keep these tips in mind so you don’t run afoul of the IRS.

The 14-day rule

Simply stated, the 14 day rule stipulates if you rent out your home for 14 or fewer days throughout the year, you don’t have to report the income to the IRS or pay income tax on those earnings.

At the same time, you must also utilize the property for your personal use at least 10% of the total days that you rent out the property.

Same goes for if you’re renting out a room. Keep it under 14 days, and you won’t have to report the income.

The downside to the 14-day rule? You also can’t take any tax deductions for any expenses incurred during the rental period. If you rent out your home for 7 days on Airbnb and decide to make some minor improvements to the property, you can’t deduct those expenses on your tax returns.

File that W9

If the rental company doesn’t offer you a w9 form when you initially agree to become a host, you can download one here. Fill it out before hosting your first guests and return it to the company office.

The rental company could withhold up to 28 percent of your earnings without it, so it makes good business sense to file your W9; your overall withholding will end up being more reasonable than the 28 percent you’ll pay without filing a W9.

Deduct those guest-service fees

Rental companies such as Airbnb, FlipKey and VRBO charge guests a percentage of the rent as a guest services fee or host service fee.

When you receive your 1099 at the end of the year that states your rental earnings, you will also see the total amount of guest-service fees. Be sure to deduct this amount from your rental income on your tax returns.

Part 2 on Friday will cover more tax tips for Airbnb hosts.

 

When Hard Times Hit Close to Home: Short Sales and Your Taxes

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Although the economy is showing signs of life is most parts of the country, there are still some consumers struggling to regain financial footing lost in the recession. Plunging home values, long stretches of unemployment and ongoing under-employment can wreck havoc on your finances. If you’re contemplating a short sale of your home, there are possible tax implications.

What is a short sale?

Let’s assume your mortgage balance is $500,000 and you can no longer continue to make your mortgage payments. Your lender agrees to allow you to sell your home for $450,000, which is $50,000 less than your loan balance. Once the sale is complete, you’re out from under your mortgage and your home.

What will happen next?

The mortgage company or lender cancels the remaining $50,000 as part of the short sale. They will issue a 1099-C Cancellation of Debt form to you at the end of the year, and you will need it to file your taxes.

How will it affect my taxes?

Typically when a debt is cancelled (e.g. car loan, credit cards) you’ll need to claim the cancelled debt as income. For example, if a credit card company cancels an old $5,000 credit card debt, you’ll need to declare that $5,000 as income on tax day.

In theory, the same rule applies for any cancelled mortgage debt due to short sale or foreclosure. However, there are two key  exceptions to that rule:

  • Insolvency: If your debts (liabilities) exceed your assets, you’re considered insolvent and the cancelled debt is exempt from being taxed as income.
  • Bankruptcy: If the short sale was discharged through a bankruptcy, it isn’t considered taxable income.

Dealing with a short sale is complex, even for the most financially sophisticated consumer, so if you’re contemplating a short sale or if you’ve already had a short sale of your home, it’s time to enlist a tax pro who can advise you based on your individual income circumstances and tax scenario.

He or she can provide valuable input regarding the changes in your tax scenario and  how to reduce your overall tax liability.

If you’re facing IRS collection or any other serious tax matter, we have tax pros on staff who can help. Get started today by either giving us a call at (888) 224-3004 or by clicking the white “start chat” button on our homepage. Don’t go it alone. We can help.

Life After Bankruptcy: Filing Your Taxes

Photo: Melenchon
Photo: Melenchon

Bad things can happen to good people: Illness, job loss, catastrophic medical expenses and natural disasters can wreck havoc on individual finances. In some cases, the only solution is to file for bankruptcy protection.

Bankruptcy not only affects your finances and credit rating, you’ll also have to take a different approach to filing your taxes. Here’s a brief look at those changes. Remember, if you are facing bankruptcy, it’s best to consult with a bankruptcy attorney for advice regarding your individual circumstances.

Once a consumer (also known as the debtor) files for bankruptcy, they are in effect turning over their affairs to a trustee. The trustee will then act on the debtor’s behalf in managing any non-exempt assets used for repaying creditors.  This arrangement forms an estate, much like an estate for an incapacitated or deceased person.

The debtor will file their customary 1040 form, and either the debtor or the trustee will file the 1041 form, which is the estate’s tax return.

Chapter 7: This form of bankruptcy is for individuals and married couples. In this case, there will be no trustee, since there are no assets that can be used to repay creditors. The tax scenario changes in that the debtor will not only file their 1040, they will also file their 1041 form on behalf of the bankruptcy estate.

Chapter 13: This is also for individuals and couples who have non-exempt assets that can be used for repaying creditors. The trustees manages these assets and utilizes them for repayment. Any tax refunds, for example would be used for repayment to creditors via the bankruptcy estate each year until creditors are paid off.

You will file your regular 1040 form, and the bankruptcy trustee will file the 1041 form on behalf of the bankruptcy estate.

Although post-bankruptcy tax filings are best handled by a qualified tax professional, learning about a bankruptcy’s impact on your tax scenario will hopefully demystify the process for you.

The decision to file for bankruptcy is never easy, and it takes careful consideration under the guidance of a qualified bankruptcy attorney.

By filing on behalf of yourself and the estate, there is less chance for errors or omissions when it comes to filing taxes in the wake of a bankruptcy filing. Plan carefully, enlist a bankruptcy attorney and a tax advisor, and you can begin to rebuild your finances over time.