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 takes good tax habits that are new to many hosts. Here are 10 things you can do to help your rental business 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 need to be taxed 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 vs business reasons (called “apportioning,” in accountant-speak). 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 business-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 your personal occupancy of the property as well as your guests to calculate your business percentage.
For example, if you rent your whole ski cabin out for 6 month of the year, and occupy the property yourself for the other 6 months, then you can claim 50% of the above expenses for the year as a deduction!
5. Calculate correctly for space in your home
If you rent a room in your home while you continue to occupy it, apportioning your expenses includes an extra step.
Similar to the previous example, you’ll begin by apportioning your expenses 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 the rental constitutes.
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 6 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%.
If you prefer not to calculate occupancy by bedrooms, you can also perform a similar calculation using square footage. For example, 1000 square feet of a 2,000 square foot apartment would constitute 25% of the space.
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 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, things like adding a new deck or remodeling your study into a rental bedroom are considered property improvements. Property improvements must be capitalized (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
- Remodeled kitchen
- 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 (may 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 Airbnb earnings as passive income from short-term rentals using Form 1040 Schedule E.
However, if you have established an LLC to hold and operate rental property, or 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 transaction 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 the occupation of 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—including New York City, San Francisco, and Portland—Airbnb will automatically withhold and pay occupancy taxes on your bookings. 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 quarterlies!
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—you’ll be expected to make quarterly estimated tax payments on your Airbnb income. To file quarterly taxes, you'll need to file Form 1040-ES .
You can find step-by-step instructions on sending in your forms and payment to the IRS here!