Top 10 Things You Need to Know About Airbnb Taxes
Apps like Airbnb have opened the short-term rental economy to millions. However, running a successful and sustainable rental business requires some learning! Stride covers the 10 things you need to know when it comes to your Airbnb taxes so your rental business can thrive!
1. Understand the 14-day Rule
You won’t owe any taxes on your Airbnb income if the following two points are true:
You rented your property for 14 days or less and
You used this property yourself for the greater of either 14 days or at least 10% of the total days you rented it to others at fair market value.
For example, Patrick rented his ski cabin out for 10 days this year. He also occupied the cabin for 14 days. Patrick does not owe taxes on his rental income.
Keep in mind though that if you qualify for the 14-day rule and don’t owe taxes on your rental income, you won’t be able to deduct any expenses associated with renting it.
2. Keep Records of Occupancy
You’ll want to keep excellent records of who's using your property and when, regardless of your tax situation. If you qualify for the 14-day exemption then you’ll need to have thorough records of the dates you rented the property to guests, as well as the dates you occupied it yourself.
If you do intend to exceed that 14-day limit, you’ll need to know the number of days the property was rented so that you can accurately calculate the percentage of time that the property was used for personal reasons versus business reasons. Knowing your property's percentage of business use will help you calculate your deduction for big tickets items like rent, bills, and insurance.
3. Document Your Business Expenses and Mileage
Even if you don’t expect to exceed the 14-day limit, tracking your expenses will still help you to know exactly how much money you’re making and spending on your rental business. If you’re not already, you can use the Stride Tax app to track your rental-related mileage and expenses for free.
Unsure which miles you can deduct? You can deduct any mileage which you can directly attribute to your property rental business. In order to safely claim mileage, you should be able to show a business purpose for the trip.
For example, travel to a property to clean it before a guest arrives is deductible. Travel to get lunch or return home afterwards probably isn’t. Unless, of course, you’re having a lunch with a prospective investor or you’re heading home to do your accounting.
4. Deduct A Percentage of Your Rent and Bills
If you exceed the 14-day limit, then you can deduct a portion of the expenses associated with maintaining your property. Big ticket examples include property taxes, insurance, utilities, WiFi, and even rent!
You’ll need to be careful to only deduct the portion directly attributable to your business. To do so, use your records of personal and guest occupancy of the property to calculate your business percentage.
For example, if you rent your whole ski cabin out for six months of the year, and occupy the property yourself for the other six months, then you can claim 50% of the above expenses for the year as a deduction!
5. Calculate the Percentage of Your Property That’s Being Rented
If you rent a room in your home while you also continue to occupy it, figuring out the portion of your expenses attributable to your business involves an extra step.
Similar to the previous example, you’ll begin by calculating your property’s business percentage based on the rate of guest occupancy. Once you have calculated a rate of occupancy, you’ll multiply this percentage by the amount of space that’s being rented out.
Consider that same ski cabin again. This time, imagine you occupy the cabin all year, but you also rent out two of four bedrooms for six months of the year. We can take our same rate of occupancy (6 ÷ 12 = 50%) and multiply it by the proportion of space occupied (2 of 4 rooms = 50%). Multiplying these two numbers gives us a deductible business percentage of 25%. You can also perform a similar calculation using square footage.
6. Differentiate Between Home Repairs and Improvements
As a rental host, you should deduct a business percentage of the repairs you need to make to your property. Keep in mind that the IRS will expect you to handle repairs to your property separately from improvements.
So, what’s the difference? Repairs include anything which allows the property to remain functional, without adding value. In everyday language, this means fixing broken things. Hiring a plumber to fix your dripping faucet or a handyman to replace a cracked window pane is a repair.
On the other hand, projects like adding a new deck or remodeling your study into a rental bedroom are considered property improvements. Property improvements must be capitalized–meaning they’re deducted over the course of several years–or added in to the tax basis of your property. Don’t worry though, by using Form 4562 you’ll be able to deduct depreciation on your tax returns for years to come.
The IRS states that any expense undertaken to better, restore, or adapt a property falls under the category of improvements. A good rule of thumb is that if you need a building permit, it’s probably an improvement! Examples include:
New front porch
Restoring a house after a casualty loss, e.g. repairing a roof after it was damaged in a storm
Restoring a house to a specific historical condition (which may also qualify you for hefty tax credits!)
Converting an office to a bedroom
Converting a garage to an in-law suite
7. Understand “Substantial” Services
The kinds of services you provide to your guests will influence how you will file your taxes. Most hosts will only provide “insubstantial services” and should thus claim their earnings from Airbnb as passive income from short-term rentals using Form 1040 Schedule E.
However, if you have 1) established an LLC to hold and operate rental property, or 2) you provide certain “substantial services” to your guests, you’ll want to claim your income as active business income using a Form 1040 Schedule C.
Heating and A/C
Water and Gas
Cleaning of common areas
Payment of HOA dues
Cleaning of the rental portion of the property while occupied (e.g. linen service)
Concierge and trip planning services
Tours and outings
Meals and entertainment
Hotel or Bed-and-Breakfast like services.
8. Get Your Tax Documentation
Airbnb will issue a 1099-K if you completed more than 200 transactions totaling $20,000 in gross income for the tax year. If that doesn’t describe you, don’t worry! They’ve got you covered with all the income documentation you’ll need either way.
Regardless of whether you receive a 1099-K, you can view an annual summary of your earnings on the Airbnb website. Your summary will reflect the number of reservations, nights of occupancy, gross earnings, deductible fees, and total payout. This information can safely be used as income documentation in lieu of a 1099-K.
9. Collect Occupancy Taxes
Occupancy taxes are a tax levied by a state or locality on short-term rentals. They vary on the city, county, and state level, so it is important to understand your local laws.
In many popular cities (like New York City, San Francisco, and Portland), Airbnb will automatically withhold and pay occupancy taxes on your behalf. However, they do not yet provide this service in all cities. In these cases, you may be expected to collect and pay occupancy taxes independently. The good news, however, is that if you do have to collect and pay occupancy taxes, you can claim them as a deduction in your Stride Tax app.
10. Pay Your Quarterly Taxes
If you have not already filled out and filed a form W-9 with Airbnb, they may withhold up to 28% of your gross income for taxes. If, on the other hand, you did file a W-9, then taxes aren't being paid on your behalf and you’ll be expected to make quarterly estimated tax payments on your Airbnb income. To file quarterly Airbnb taxes, you'll need to file Form 1040-ES .