With the summer season underway, some homeowners may be thinking of listing their homes on Airbnb or other short-term rental platforms to bring in a few extra dollars. Before they do so, they should be aware of the issues involved, according to Barbara Weltman, author of “J.K. Lasser’s Small Business Taxes 2019.”
“They should check local zoning laws and homeowner association rules, and they should check on whether there is any local occupancy tax to be paid,” she said. “For example, a Massachusetts excise tax of 5.7 percent — up to 6.5 percent in Boston — goes into effect on July 1, 2019.”
And then, there are a host of federal tax rules that need to be addressed.
“Short-term rental hosts must be concerned first and foremost with federal income taxes,” said Stephen Fishman, author of “Nolo’s Every Airbnb Host’s Tax Guide.” “If taxpayers rent their property for 14 days or less during the year, they may not have to pay any income tax at all on their rental income. However, if they rent their property more than 14 days during the year, they have to pay federal income tax on the net rental income they receive during the year. When they file their tax return, they add their net rental income to their other income for the year, and pay income tax on the total. The net rental income is the total rental income minus the deductible rental expenses.”
“In theory, since rental income from annual rentals of 14 days or less is tax-free, the taxpayer doesn’t have to list it as income on their tax return,” Fishman observed. “The instructions for Schedule E expressly provide for this. However, as a practical matter, if Airbnb or another rental platform the taxpayer uses reports the rental income to the IRS on a Form 1099-K or 1099-MISC, the taxpayer could have issues with the IRS due to computer matching. If the income shown on these forms doesn’t match the income reported on the taxpayer’s 1040, the IRS may question the taxpayer, most likely through correspondence.”
Although Airbnb and other rental platforms generally will not report rental income of 14 days or less during the year to the IRS, if taxpayers do receive a 1099 they should take steps to avoid being questioned by the IRS, Fishman indicated: “The IRS hasn’t provided any guidance on this, but one approach is to file Schedule E and list the rental income on Line 3 as ‘Rents received,’” he suggested. “Then, on Line 19 — ‘Other’ — list the income as an expense and add the following note on the space provided in Line 19: ‘Rent on Line 3 is exempt from tax under Section 280A(g) — residence rented less than 15 days.’ Then list ‘Zero’ on Line 26, ‘Total rental real estate and royalty income or loss.’ This should [satisfy] IRS computers since the income shown on the 1099 will be listed on your return.”
The portion of current-year state and local property taxes attributable to rental income may be deducted as an operating expense, and it doesn’t count toward the $10,000 SALT cap of the Tax Cuts and Jobs Act, Fishman noted. “Thus, if taxpayers itemize their deductions, engaging in short-term rental activities could help them deduct more property tax,” he said.
“The most important issue for most hosts is to keep track of all their expenses,” Fishman emphasized. “These include the listing fee, cleaning fee, and things you buy, like shampoo, candy, etc. Also, anything you buy for repairs, and depreciation allocated to how much and how often the property is rented,” he said.
“Airbnb and other platforms collect the rental fees from the guests, and pay the relevant local taxes to the appropriate agency,” he said. “But there’s no uniformity, so the taxpayer needs to find out what the local taxes are and ensure they are paid. Of course, if taxpayers don’t use a platform but list the rentals independently through Craig’s list, they are responsible.”
