The content of this post is not intended to replace the advice of a licensed tax professional. Consult a qualified tax professional for questions specific to your individual circumstances.
Let’s suppose you enjoyed renting your home through a peer-to-peer company such as Airbnb and would like to rent beyond the 14-day tax-free period. Here are some important tips to keep in mind as you expand your rental business.
Congratulations, you’re a business owner!
It is important to treat your rental activities as a business regardless of where they fall within the 14-day period.
Keep meticulous records. If you confine your rental activity to 14 or fewer days for the year, keep records of your rental income and any receipts. Rental companies are required by law to report any and all income to the IRS, so the IRS may in turn contact you, even if you rented your property for less than 14 days.
If this is the case, you will need to provide documentation of your rental activities verifying they fell within the 14-day rule. A reservation print-out or other form displaying the rental date(s) may be all you need.
As with any IRS correspondence, follow all instructions on the notice, and call the IRS if you should have any questions or can’t locate the documentation they will need.
For longer rental periods, keep track of your non-rental and rental days throughout the year. Detail the specific dates so you can more accurately track your rental income and expenses for those timeframes. You will also need to track your personal expenses for the time frames during which you’re not renting out your home.
Track all business expenses
The IRS allows you to deduct “ordinary and necessary” business-related expenses from your rental income. For example, if you buy patio furniture or other items for guests to use, you can deduct that expense against your rental income.
The same applies to major expenses such as mortgage interest. This is where detailed and accurate record-keeping is key in order provide accurate income and expense figures on your tax forms.
Pay self-employment taxes
As a small business owner, you will need to pay self-employment tax in addition to income tax. Self-employment taxes cover the Social Security and Medicare contributions based on your income.
If you want to side-step any “sticker shock” on tax day, set aside a percentage of your rental earnings to cover self-employment taxes. The total self-employment tax rate is currently 15.3 percent.
Get to know your state and city occupancy tax rules
While Airbnb, FlipKey and VRBO have evoked controversy in some large cities, these rental activities are welcomed in other communities. Check with your city’s occupancy tax requirements and terminology, as it varies from state to state.
While Airbnb may collect and submit these taxes in certain states, it’s best to confirm the rules, rates and regulations that apply to your state or community. In some cases terms such as “hotel tax” “transient lodging tax” may be used interchangeably with “occupancy tax.”
Airbnb and similar peer-to-peer rental companies allow travelers to forgo expensive hotels and to stay with a local resident instead.
Hosts reap the benefits of the additional income and showing off their community to out-of-town travelers. By fully understanding the basics of property rental, you will have the opportunity to decide in advance if hosting Airbnb guests is a worthwhile activity.