Being an Airbnb host is a great way to start using your home as an investment property, which can be very financially rewarding. Whether you rent your home out under a short- or long-term rental agreement, those additional gains make a substantial economic impact. To help you get started, here's a list of things every Airbnb host should know.
The 14-day rule
First things first, if you rented your rental property for 14 days or fewer, you may not have to pay taxes on income derived from your rental activity. This is called minimal rental use, otherwise known as the 14- day rule.
Your rental activities are subject to the minimal rental use if your rental property was occupied for 14 days or fewer during the tax year and the property is your residence that you also use for the purpose of deriving rental income.
If you find yourself in this tax situation and you meet all other requirements (i.e., you must meet the personal-use requirement), then you will not report your rental income or your business expenses, nor will you claim any of the associated tax deductions. This tax rule applies even if you only rented out one room and if you have multiple dwelling units.
On the other hand, if you rented your property out for a period of longer than 14 days, you will have to report this income to the IRS.
Short-term rental agreement
You may have also leased your property out for a short term and entered into what is called a short-term rental agreement. As a caveat, each state has its own definition of a short-term rental, so make sure to check the Airbnb listing for your state or locality. For example, in Baltimore, Maryland, a short-term rental period is a period of less than 90 days, but in Las Vegas, Nevada, the short-term rental period is for 30 days or less.
Additionally, there may be a short-term lease licensing requirement in your state or locality. You may also be subject to some local taxes and occupancy tax. For this reason, it's important for you to check your local government’s Department of Housing website or ask your tax professional the rules for your jurisdiction.
While the jurisdictional rules may differ, the federal tax considerations are the same.
Submitting Form W-9 to Airbnb
As an Airbnb host, you must submit Form W-9. Failure to submit Form W-9 could result in significant consequences for you. If you fail to submit your W-9, Airbnb could withhold 28% of your rental income in taxes, so be sure to get this form completed.
Will I receive any tax documents from Airbnb?
If you lease your property for any period and have Airbnb earnings, Airbnb could issue a 1099 K. Form 1099 K is issued if you received $20,000 or more through a third-party platform (in this case the third- party platform is Airbnb) and the platform processed more than 200 transactions during the tax year.
If you receive Form 1099-K, the income reported to the form will be reported to the gross receipts section of Schedule C on Form 1040.
How to report the rental activity
While most rental activity is reported to Schedule E, payments received on form 1099-K have to be reported to the gross receipts line of Schedule C. The income reported to Schedule C will flow to the line of Schedule 1, which will then flow through to line 8 of Form 1040. This is just one way your rental income can be reported on your tax return.
In general, Schedule E is used to report your rental income on your tax return. Schedule E is used to report rental income when you do not provide a substantial service.
Reporting requirements for nonresidents
In addition to Schedule C and Schedule E, if you are a nonresident of the United States, you will have some additional reporting requirements. You will need to complete Form W8- BEN, and Airbnb will send you Form 1042-S. Things can get quite tricky if you aren't a U.S. resident and you receive U.S.-sourced income. If this is your tax situation, I highly recommend you use a tax professional.
Are security deposits included in income?
If you enter a rental agreement with an occupant and collect a security deposit for either a short- or long-term rental, the security deposit when received should not be included in your rental income. While this is the general rule, if you keep any part of the security deposit during the year, then the portion retained should be included in your income.
Self-employment tax basics
If your income has been reported to Schedule C, you may have to pay some self-employment tax on this income. Self-employment is calculated on Schedule SE. For 2020, the self-employment tax rate is 15.3%. .This rate comprises 12.4% for social security and 2.9% for Medicare. Additionally, you can deduct the employer-equivalent portion of your self-employment tax when figuring your adjusted gross income.
Is income reported to Schedule E subject to self-employment tax?
The rental real estate income you earn that is reported to Schedule E is generally not included in net earnings from self-employment subject to self-employment tax but is generally subject to passive-loss limitation rules.
The passive-loss limit rules that are applicable hinge upon whether or not you materially participate or passively participate in rental activities. You will also need to consider whether or not you materially participated in the rental activity or whether the activities you engaged in were passive activities. This will make a huge difference in terms of the deductions you can claim.
What if I made estimated tax payments during the year?
If you made estimated tax payments during the year, you should keep a record of the payments made; this information will be included on your income tax return.
Are Airbnb service fees and business expenses deductible?
In general, the IRS allows deductions for business expenses that are ordinary and necessary for your trade or business. This includes the service fees you pay for using the Airbnb platform. In addition to the service fees, you may have paid some state licensing fees; these fees are also deductible. While these fees are deductible, remember that you will not be able to claim a deduction for the expenses paid if you rented your property for 14 days or fewer.
In addition to these fees, for tax purposes, you can claim a deduction for any expenses you incur that are related to your rental activities. It's important to practice good record keeping and keep track of any expenses associated with your rental property.
Millionacres bottom line
Being an Airbnb host can be financially rewarding. These financial rewards don't come without a dedicated effort to focus on your taxes, tax forms, or tax deadlines. Always keep in mind the number of days you host during the tax year, the state and local rules, and your business expenses -- and always practice good record keeping.