SBS Tax and Consulting Services
Are you an AirBnB host? These are the things you need to know
Updated: Jun 30, 2022
If you are thinking about using Airbnb or other short term rental sites to make a little extra money, these are the important things you need to know and you can follow the tax tips below to keep your income taxes to a minimum or even somethings complete eliminate.
1. Rule of 14 days
You won’t own any taxes on your Airbnb income if you meet the following requirement:
· You rent out all or part of your home for 14 days or less, and
· You used your home for the greater of either 14 days or at least 10% of the total days you rented it to others (personal use requirement)
If you meet both requirements, you don’t even have to report the income to the IRS. Your rental income is tax-free. However, if you only rent a room in your home and continue to live in the rest of the space, you will meet the personal use requirement. If you rent out the entire home, and you don’t live in the same home with the tenant, you need to keep careful track of your rental or non-rental days.
2. More than 14 days
If you don’t meet both requirements of rules of 14 days, you won’t qualify for the tax-free treatment. Indeed, you will have to report and pay income tax on your rental income by filing IRS Schedule E along with your tax returns. Also, you will be allowed to deduct your rental related expense within some strict limits.
You can list all your rental income and expense on Schedule E, and the profit left over after you deduct your rental expense from your rental income, will be your taxable rental income. If your expenses are more than your income, you may not deduct the loss from your other source of income you earned that year (Ex: you can’t deduct your rental loss to offset your business profit). Such a loss can be carried forward indefinitely until you have rental income that you can deduct them against or you dispose of your entire interest in the property
3. Keep records of Occupancy,
If you rent out a part or your entire property in Airbnb, you should have a record of the dates you rented the property to the guest. You must keep it as a record.
If you are qualified for the rule of 14 days, you need to keep these records as a backup for your tax-free rental income. If you intend to exceed that 14-day limit, you need these records to calculate the percentage of time that the property was used for personal reason and rental reason. Knowing your property’s percentage of rental use can help you to calculate your deduction for items, such as utility bills and insurance.
4. Document all business expense
You are entitled to deduct all ordinary and necessary expense to operate your rental business in Airbnb. If you buy new towels for your guest, you can deduct this expense from your rental income.
You should keep all the receipts and invoices for the products or services you purchase for operating your rental business. By keeping clear records and recording all money you spend on the rental business, you won’t have to go back through credit card statements for proof for the IRS
5. Difference between Repairs and Improvement
Keep in mind that the IRS will expect the host to handle repairs to your property separately from improvement. Repair includes anything which allows the property to remain functional, without adding value. (Ex: hiring a plumber to fix the broken toilet). Property improvement is adding new deck or remodeling your property to become a better property with a higher value. (Ex: hiring a construction company to remodel the bedroom to fit in more guests)
The expense for repair can deduct from rental income, but the expense for property improvement must be capitalized, which mean they are deducted over the course of serval tax or added in the tax basis of your property. The host can file a Form 4562 to deduct deprecation on the tax return for years to come.
6. Guest service fee, host service fee, and other service fees
Airbnb and other short-term rental companies usually charge a percentage fee, call guest service fee or hose service fee when the guest paid their rent. When the host has more than $600 gross rental income, these companies will send you a 1099 form reflecting your house rental earnings for the year, and it includes the amount of service fee. If you rent out your home for more than 14 days, you can deduct the entire amount of guest service fee/host service fee from the rental income.
7. Get your tax documentation
According to Airbnb, they will issue 1099-K to all U.S users who earn over $20,000 and have 200+ transactions in the calendar year.
For Non-U.S people, who own property in the U.S and rent out through Airbnb, have to provide a Form W-8 to Airbnb. Airbnb usually issues a Form 1042-S in the late February of each year to provide the gross earning and total payout to the Non-U.S host.
8. Occupancy tax
Some states and city impose occupancy taxes on short term rental. The occupancy taxes vary on the city, county, and state level, so it is important to understand your local tax laws.
In many big cities like New York City, San Francisco, and Los Angela, Airbnb will automatically withhold and pay occupancy taxes on your behalf. However, in some cities, you may be expected to collect and pay occupancy taxes independently
Bonus Section: Airbnb in NYC
The New York State Multiple Dwelling Law (MBL) establishes the standards for all buildings contain three or more dwelling until. The MDL prohibits the unhosted rental of fewer than 30 days in “Class A” multiple dwellings- building occupied by 3 or more families living independently. In other words, hosts cannot legally rent out their entire property if they live in a building with 3 or more units and the rental period is under 30 days
There are 2 options for NYC hosts to rent their properties in Airbnb: they can either rent out their entire house or apartment or they can list the house or apartment as shared accommodation, renting out an individual room to guests.
The penalty for violating the MDL can cost up to $2500 per day for violation of the law.
In general, Airbnb automatically collects and pay certain occupancy taxes on behalf of hosts whenever a guest pays for a booking in specific jurisdictions. In some jurisdictions, hosts may need to manually collect occupancy taxes and file the information tax return.
If your property is in the area where Airbnb will automatically collect and pay occupancy tax on behalf on you, Airbnb will withhold a certain percentage of your rental income when the guest paid. However, the occupancy tax you paid to your state and local government can be deducted as a rental business expense.