Short term stays through popular rental services like Airbnb are fast becoming the norm. Those who have listings on Airbnb usually hack homes or use their homes for short term vacation rentals. It’s a great system and an excellent way to earn a premium rental fee over a typical monthly rent.
But how does Airbnb’s taxes change your total liability?
If investors aren’t careful, they can submit income from Airbnb or similar hosting services to self-employment tax at an additional rate of 15.3%. Let’s discuss how to subject yourself to this tax and how to avoid it.
Afraid of the tax season?
Unsure how to maximize the deductions for your real estate business? in the The book on tax strategies for the savvy real estate investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only get your taxes done this year – but also to prepare an ongoing strategy that will make your next tax season so much easier.
Self Employment Tax Basics for Airbnb Hosts
Self-employment taxes can be part of your experience when renting out your property on Airbnb or similar websites. Your income from renting your home must be reported to the IRS when you file your tax return.
Note that Airbnb does not withhold taxes from your rental income. Airbnb will issue you a 1099-K if your earnings exceed $ 20,000 in a year, and the company will report your earnings to the IRS. It is a good idea to report your total earnings each year regardless of your profit.
If you are self-employed, you can deduct business expenses (more about the deductions later in the post). However, there is an additional income tax at a rate of 15.3%. Since self-employed taxpayers are both the company and the employee, you are responsible for paying Social Security and Medicare taxes. This could decrease your annual income and increase your tax bill if you’re not careful.
Understand the 14-day rule
If you rent your home or vacation home for 14 days or less per year, you don’t have to pay any state or federal taxes. So Airbnb taxes are easy! The 14-day residence rule only applies if you live in the apartment for at least 14 days in the same year.
Report your Airbnb tax income
If you rent your house or vacation home for more than 14 days a year, you must report the rental income earned to the IRS. The question is whether you should report this income in Appendix E or Appendix C.
In general, you have no choice and are required to report rental income in Appendix E. This is an advantage over Appendix C, as reporting income in Appendix C makes earned income subject to self-employment tax. This explains why investors who sell and sell real estate typically set up S-Corps to minimize the self-employed tax liability.
Reporting income in Appendix C also generally excludes those income / losses from the generous deduction for passive activities, which can be up to $ 25,000 until you meet the adjusted gross income (AGI) thresholds. The position of the IRS is that if you report rental activity in accordance with Appendix C, it is no longer a rental activity, but a business.
If your average rental period is more than seven days but less than 30 days and you are providing significant services, the IRS will assume you are running a hotel or bed and breakfast. This income is reported in Appendix C and is subject to self-employment tax.
The problem is that net losses from these activities are still considered passive losses and as mentioned above, you may not be eligible for the $ 25,000 passive loss offset. So it really is a lose-lose situation when your earned income is subject to self-employment tax or your losses are not deductible.
Defined essential services
Significant services are primarily for the convenience of your tenant, such as regular cleaning, linen change, housekeeping, cooking meals, etc. Significant services do not include the provision of heating and lighting, cleaning of common areas and garbage collection. Basically anything a hotel would do is considered an essential service for the comfort of its guests.
Appendix E versus Appendix C impact for Airbnb taxes
To illustrate this, let’s say you buy a property for $ 100,000 in cash and use Airbnb and other hosting services to rent it out. For the full year, your gross gross income was $ 25,000 and net income after all expenses, including depreciation and amortization, was $ 10,000.
Assuming your average rental period is more than seven days – and you have NOT performed any essential services – the income and expenses are reported in Appendix E, so your net income remains at $ 10,000.
If you have provided essential services, report your income and expenses in Appendix C, which subjects your net income to self-employment tax, a tax rate of 15.3%. Now your net income, before being subject to your marginal tax rate, is only $ 8,470.
How to Mitigate the Risks of Schedule C
- Set a minimum rental period of eight days.
- Do not offer your guests extensive services such as daily cleaning of the rooms, doing laundry, changing sheets and providing daily meals.
- If you can, increase your average rental period to more than 30 days.
The bottom line is that income is generally better reported in Appendix E than Appendix C. Short term and vacation rentals increase your reporting risks and can have a significant impact on your tax liability. Take the necessary steps today to reduce your reporting and tax risks.
Airbnb tax deductions for businesses
You may be wondering if there is anything else you can do to minimize your tax liability. If you’re self-employed, you can deduct business expenses like rent or mortgage, Airbnb service fees, insurance, property taxes, and more.
Repair costs and home improvement costs can also be deducted! Keep your receipts and keep your finances well organized regarding your short term rental. It is better to be prepared in case the IRS has any questions.
Don’t forget occupancy tax!
Residential taxes are paid to state and local governments when you own and operate a short-term rental property.
Airbnb will automatically withhold occupancy tax for certain areas. Check to see if your state has an Airbnb withholding agreement. Otherwise, you will have to pay them out of your net profit.
More about short-term rentals from BiggerPockets