Royal Financial

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The Tax Implications of Having an Airbnb

At this point, I think everyone has heard of “Airbnb”.  You have a spare house or room that is dormant.  Airbnb allows you to rent your spare space to travelers for a steady, or hopefully steady, inflow of cash to cover whatever expenses you have.  As a CPA who has spent a majority of my time in the real estate industry, I can’t help but ask myself, “Wait. What are the tax implications of this?”

The wealthy ask the same question or at least think to consult with their tax advisor.  Unfortunately, the average American won’t ask themselves these questions; as Tony Robbins once said, “Ignorance is not bliss.  Ignorance is poverty.  Ignorance is pain.”

I know what some of you are thinking reading this, “Ugh! I hate taxes”.  However, like many things, with proper knowledge of the subject matter, tax knowledge can be a tool.  A tool to increase your after tax return on investment while at the same time keeping you in good standing with our friend “Uncle Sam.”

In order to properly assess the tax implications of operating an Airbnb, there are key terms we need to understand as they pertain to your Airbnb property (or room):

1. “Residence”; and
2. “Rental”

“Residence”

Under the current Internal Revenue Code (“IRC”) no deduction is allowable with respect to the use of a dwelling unit that is used as a “residence”. It is important to note that there are exceptions such as:

1. Mortgage Interest;
2. Real Estate Taxes; and
3. Casualty Losses

However, as some of us may know already, these exceptions may be limited in one way or another on Schedule A of an individual’s tax return. Reasons for potential limitations could include not filing Schedule A as a part of your individual return or having an adjusted gross income (“AGI”) outside the allowable amount; either case may prevent you from reaping the benefits of the exceptions above. .

So, what classifies your home as a residence?  Per the Internal Revenue Code, your home is considered to be used as a “residence” if you use it for personal use for a number of days which exceeds the greater of:

1. 14 days, or
2. 10% of the number of days during such year for which such unit is rented at fair rental.

“Rental”

A rental unit is property that on a regular basis is exclusively for rental to customers.  This is very common with investment properties where an individual (or group of individuals or businesses) buy a property for purpose of renting it out to tenants.

Simple, right?  If you live in your house all year, it’s your “residence”; if you rent it out all year, it’s a “rental”.  Where things get a little more complicated is when your rental space is used as both a “residence” and a “rental” property.  To illustrate, we will walk through a couple scenarios.

Scenario 1: Rent the property for fewer than 15 rental days during the taxable year

Sam lives in Miami, FL.  Due to the location of the property, Sam realizes that she can utilize Airbnb to make some extra cash.  So, during events like Ultra and Carnival, Sam rents the apartment to travelers.  In 2017, the space was rented for a total of 14 days with an average rate of $300 per night.  How much is subject to income tax?  None!  No, that isn’t a typo.   None!  There is an exception in the internal revenue code that states if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then no deduction is allowable and no income is included in gross income.

It is important to stress that no deduction is allowable.  If a tenant rented during Ultra and, on the last day, come back, tear your place up and don’t pay the rental fee, you can’t deduct those costs.

Scenario 2: Rental days exceed 14 days but your personal use doesn’t exceed 10% of the Fair Rental Days

Sam purchased a second property in Miami, FL, after realizing how profitable renting space to visitors can be.  Sam doesn’t use the space as a personal residence for the greater of 14 days or 10% of fair rental days.  In addition, this unit is rented out all year.  As a result, this property is considered a rental property and deductions can offset income, even potentially going so far as to cause a net loss.

Allocating Cost

Costs are deducted in various manners depending on the use of the property.  If the unit is strictly a residence (rental for less than 15 days) then the costs that may be deducted are limited to the following:

• Real Estate Taxes (Schedule A)

• Losses (Schedule A)

If your property is an investment property and strictly a rental all year, then all costs associated with operating the property are deductible.  These costs will be reported on Schedule C or Schedule E.  Additional deductions include advertising, utilities, repairs and occupancy taxes.

Where things get a little more complicated is when property is used for personal purposes for at least one day.  When this occurs, the amount deductible by reason of the rental use of a unit is based on the percentage of fair rental days to the total number of calendar days the unit is used for any purpose during the taxable year.

Another quirk occurs when you are renting out a portion in a unit.  In this instance, with respect to general expenses or those not easily allocable to the specific space, such as real estate taxes and utilities, the expense must first be allocated based on space then on the number of days.

Other Considerations

It is important to note, that the above is general in nature and doesn’t consider an individual’s specific tax position or Airbnb operations.  A few other items we haven’t discussed that you should consider when operating an Airbnb or any other rental property include:

1. Passive Losses, which are only deductible to the extent of Passive Income
2. Income tax isn’t the only tax paid with respect to Airbnb’s. Depending on the local jurisdiction where the property is located, there are possible occupancy taxes or other types of taxes based on rents that must be paid.
3. Tenant services, such as:
   1. Laundry
   2. Dining
   3. Tour-Guide

Any one of these items may trigger additional taxes such as Self-Employment taxes on income generated from such activities and should be considered in addition to the concepts covered above. See Airbnb Flowchart for a visual.

Contact Us

To see how Airbnb operations impact your tax position please contact Merlynd Ameti at merlynd.ameti@royalfinancial.co

Disclaimer

The information provided herein is intended solely for information purposes and no person(s) or other third-party may rely upon it as tax or legal advice or use it for any other purpose.  As a result, Royal Financial assumes no responsibility whatsoever to Airbnb hosts, or any other hosts for that matter, as a result of the use of information contained herein.