A profitable way to convert your home into a means of producing income is the rental of it completely, or just in part (a room), even for a short period of time. Taxpayers may avail themselves of rental services like Airbnb, HomeAway, or VRBO to accomplish this. Of course all income is “all income from whatever source derived” under the Internal Revenue Code. Income earned through the rental of your home, or a room in your home, is taxable “income” and must be reported to the IRS on your tax return.
Here’s how it works if you rent part or all of your home on Airbnb. Guests are required to use Airbnb’s payment system to make a reservation. Guests pay Airbnb when they book accommodations and then Airbnb releases the money to hosts 24 hours after the guest checks in. To help cover the costs of running these services, Airbnb automatically includes service fees in each transaction as well as some government-required taxes in certain places. Each year by filing IRS Form 1099-MISC, rental services like Airbnb report all of these rental payments to the IRS. Thus, the IRS already has this information on file regarding a taxpayer’s rental income and expects his or her tax return to reflect it.
The tax rules and regulations involved in computing this rental income is complicated, like much else in the Tax Code. Services like Airbnb will not make this calculation on your behalf. The key thing to remember is that the amount of time, specifically, the number of days, taxpayers rent their rooms and homes is the determinative factor in whether the income must be considered taxable income.
If a main residence (house or apartment) is leased for over 14 days during the year, and the taxpayer lives in it 15 days or more, proceeds from this arrangement qualify and must be reported as income. Schedule E must be filed with the tax return. However, rental expenses may be deducted, but within strict IRS guidelines designed to ensure that personal expenses are not deducted as rental expenses.
Rental income and expenses are listed on Schedule E. Annual rental deductions are limited to the rental income from the home. Income tax must be paid on any profit remaining after rental expenses are deducted from rental income. However, if expenses exceed income, the loss may not be deducted from other income earned in this particular tax year. However, this loss may carried forward to future years and deducted from rental income from the property, if enough rental income exists in the applicable future tax year.
Taxpayers can rent out all or part of a home or apartment for up to 14 days per year and all rental income received is tax-free, no matter how much this amount is. Taxpayers are not even required to report this income to the IRS. Rental income is tax free if, during the year:
- the home is leased or rented for 14 days or less, and
- the home is used personally for more than 14 days, or more than 10% of the total days it is rented to others at a fair rental price.
If only a room is leased or rented and the taxpayer continues to live in the rest of the space, the personal use requirement will be easily met. Otherwise, if an entire home or apartment is leased, the filer must keep careful track of the number of rental and non-rental days. If both of these time requirements are met, the IRS does not consider the home to be a rental property, Schedule E is not filed, and any operating or depreciation expenses for the property may not deducted.
100% of direct rental expenses may be deducted. These are expenses that apply only to renting, such as fees or commissions paid to the rental agency, advertising, credit checks, insurance for the rental, cleaning costs, repairs solely for the rental portion of your home, and depreciation (limited to the rental portion of the home).
A portion of general expenses to own and operate the entire home may be deducted, such as mortgage interest and real estate taxes, utilities, insurance for the entire home, cleaning expenses for the entire home, repairs for the entire home, Internet connection fees, gardening, and other home maintenance expenses. This deduction must be allocated based upon the amount of time the property served as a rental, compared to the total time it was used during the year.
If, instead of renting the entire home, only a room or rooms are rented, general expenses may be deducted in proportion to the amount of the home rented. For example, if you have a six-room home and rent one room, you could deduct 1/6 of your general expenses for your entire home.
If you need help or information about the tax implications of renting all or part of a personal residence and have questions about whether your rental income is taxable, call your tax experts at Thorgood Law Firm www.thorgoodlaw.com, for a FREE consultation at 212-490-0704.
