It’s no secret that hotel costs can be exorbitant. That’s where AirBnB comes in, connecting budget-conscious travelers with eager hosts worldwide. Not only can hosts set their own prices but, with a service fee of just 3%, there is also plenty of opportunity for users to make serious money.
Currently available in over 34,000 cities and 190 countries, this service caters to two types of hosts: those who buy property specifically to rent out, and those who want to make a little extra money renting out spare rooms in their current homes. While AirBnB can be beneficial for both types of hosts, it’s important that tax requirements vary with each choice. Additionally, the number of days for which you opt to rent out space can affect your tax burden.
Understanding the various rules and regulations associated with AirBnB rentals is crucial to avoiding IRS issues, so we’re here to review what you should know.
Income Tax Guidelines
The U.S. sets strict guidelines regarding the amount of time for which hosts can rent out their property. According to the IRS, individuals can rent out all or a portion of their property for up to 14 days per year without having to pay taxes on rental income. However, those hosts who rent for more than 14 days are responsible for filing IRS Schedule E along with their tax returns and paying the requisite tax.
It’s important to note that hosts who rent out their entire homes must meet the personal use requirement by staying in the home more than 14 days a year or more than 10% of the days it’s rented out to others.
Additionally, non-U.S. persons with taxpayer identification numbers may also be required to pay taxes on rental income. AirBnB may provide a host with a 1099-K or a 1042-S form showing reportable earnings for the year.
Some AirBnB hosts find themselves facing tax charges equivalent to running a hotel or bed and breakfast. The IRS may levy these fees if a host designates certain rooms in the home for rental use only. Additionally, those hosts who provide services like cleaning and sheet changes could find themselves owing more. If the government decides your AirBnB activities qualify as a business venture, you will be required to pay federal income taxes as well as self-employment taxes on your income.
For best results in these cases, avoid providing services that would classify your home as a B&B. These may include cooking breakfast for guests, doing laundry or even cleaning rooms every day.
Occupancy Tax Guidelines
Along with traditional federal taxes, AirBnB hosts may be responsible for paying something called the occupancy tax. This is a tax levied by a state or municipal tax authority on room rentals, and is also known as a lodging tax, room tax or tourist tax.
It can apply to both general accommodations, as well as on fees for services like cleaning. Because occupancy taxes vary by locale, it’s important to stay up to date on the specific requirements for your place of residence.
While occupancy taxes are paid by guests, hosts are typically responsible for remitting this payment to the IRS each year. If required to collect this tax, you have the option of adding it to your nightly rate or asking that guests pay at the time of arrival. For best results, be transparent about it. Be sure to educate your guests about their tax requirements at the time of booking. The last thing you want is for guests to be surprised by last-minute price changes and fees.
Maximizing Deductions on Your AirBnB Income
Hosts who rent their properties for less than 14 days a year typically don’t have to pay taxes, and are hence prohibited from deducting rental expenses. However, if you are on the hook for tax payments based on your rental income, it’s important that you take steps to maximize potential deductions. Items you may deduct include rent and mortgage costs, maid service and cleaning fees, homeowners insurance, repairs to rental spaces, depreciation and even commissions paid to the rental agency (e.g. AirBnB).
Additionally, you may be able to recoup expenses from internet and cable payments, real estate taxes and utilities. Generally, hosts can deduct 100% of rental expenses and a portion of their general expenses, depending on the number of days a year for which a property is rented.
If you have a spare room or unused piece of property, AirBnB can be a viable income source. However, individuals who rent out space in their homes need to pay close attention to their tax obligations. Do your research now to avoid hefty penalties from Uncle Sam down the line.
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