Airbnb & Taxation

In 2008, the phenomenon known as Airbnb was born. Since then, many people have used the service to rent out their property to make some extra money on the side. However, with this rise in popularity comes increased scrutiny from various government agencies. This applies especially to cities and local governments, which have become more aggressive and have expanded their operations to audit an increasing number of taxpayers that use Airbnb to generate income.   Unwary taxpayers who do not comply with the necessary tax laws and regulations face the possibility of paying additional tax, penalties, and interest for a multi-year period.

You can be sure that renting out your home, even if it is on a short-term basis, triggers federal and state income tax consequences. You should also be aware that Airbnb reports to the IRS the rental payments that it sends to their hosts through an IRS Form 1099-MISC, which the IRS will then expect to see as rental income on your next annual tax return. As with any income outside the regular wage-earning through a paycheck, tax rules can become complex and turn into a tangle of “ifs and whens.”

14 Day Rentals (Or Less)

In the eyes of the IRS, short-term rental means 14 days or less per year. In other words, no matter how much you earn, the income will be tax free just as long as you do not surpass the 14 day mark on renting your entire personal residence or a designated space in your home. In fact, you are not even obliged to report the rental income on your tax return as long as the home is used personally for more than 14 days out of the year, or 10% of the total days it is rented. However, you cannot report expenses or deductions pertaining to this rental activity.

More Than 14 Days

If you happen to rent longer than 14 days, you now must file an IRS Schedule E form with your annual tax return and you may pay taxes on this income. You can deduct your rental expenses, but your deductions are limited to the amount of your rental income.. If your expenses exceed your rental income, you may not take deductions against any other income you have. The IRS also looks very closely to what expenses you are showing, as it will not tolerate deductions on personal expenses. Some expenses that you may deduct include:

• Fees or commissions
• Advertising
• Credit/Background checks
• Insurance
• Cleaning and maintenance/repairs
• Depreciation

Other Tips

Keep meticulous records of renting dates and hold on to things like receipts and any other documentation related to the rental. Government agencies generally place the burden on taxpayers to keep records and prove their expenses. A good rule of thumb is to save all these records and then speak to a tax professional about them later if you are not sure how to handle them.. Additionally, you want to be able to easily access the records in case the IRS asks you to prove-up your expenses. .

If you get a letter from the city, state, or IRS regarding your activity – do not panic. Dallo Law Group can help you prepare for an audit, uncover any areas that you need to come into compliance with, and plan for future tax consequences. We have dealt extensively in this area, and whether you are thinking about entering the Airbnb market or have become a seasoned landlord, we are more than happy to help you better understand what areas require your attention.  As always your initial meeting with us is completely free. We can be contacted at 619-795-8000.