Home sharing is a lucrative sport in real-estate, but it could bring sticker shock on tax day. Whether you are passively earning home share income or are a property slinger on sites like Airbnb or VRBO, this is everything to know about filing home sharing taxes.
In this article:
- What are home sharing taxes?
- Schedule E vs Schedule C
- What is the Masters Exception?
- Substantial services vs insubstantial services
- Dividing expenses between rental and personal use
- Passive vs active rental income
What Are Home Sharing Taxes?
Home sharing taxes are due on earnings from rental platforms like Airbnb, VRBO, Flipkey, etc. When you rent out your space you are responsible for income and transaction taxes. How much you owe is determined by: the number of days you rent/year, personal use of the space, the services you provide to guests, if you actively participate in managing your rental, and the location of the property.
When Do I Pay Home Sharing Income Tax?
You need to pay home sharing income tax on anything earned over the 14-day rule—more on that below. 1099-K’s are issued if you make over $20,000 or do 200 transactions in a year. Even if you don’t receive a 1099-K, you still need to report your income because your home sharing platform sends your tax information to the government.
When Do I Pay Occupancy Tax?
Occupancy tax is a transactional tax that some property owners will owe. Similar to sales tax, occupancy tax is passed to customers as a tax on the total rental price, then remitted by property owners. It is collected at the state and local level on short-term rentals, usually for visits that are less than 30 days. The tax ensures that people who are visiting the community are paying into local amenities.
Occupancy Tax AKA
- Lodging Tax
- Hotel or Motel Tax
- Room or Bed Tax
- Tourist Tax
- Stay Tax
In the case of home-sharing, many sites have agreements with local jurisdictions and handle this tax for you. Still, it is your responsibility to collect and remit any taxes they do not. So it is important to be familiar with your local tax rates, and when payments are due. Occupancy tax is generally paid monthly or quarterly to your state, city, and/or local government tax agency.
Accounting for Airbnb and VRBO
Your 1099-K from AirBNB, or other home sharing platform, needs to be reconciled before filing taxes. What does that mean? Throughout the year you should be accounting for your rental income and expenses, plus any taxes and fees charged to your stays. Simply recording your bank deposit from AirBNB as income is not the whole story of your earnings.
Come tax time your 1099-K will show your gross income. Gross income is the total of your rental charges before any refunds, service fees, discounts, or adjustments. If you are only summarizing your bank deposits at the end of the year, you will get a number that is less than the gross income reported on your 1099-K. What you report as home-sharing income needs to match your 1099-K, so accounting should be done continuously to report accurately.
How To File Home Sharing Taxes
To file Airbnb rental taxes and other home sharing income taxes, you will need to distinguish certain aspects of your rental business. You have to disclose what type of renter you are, what type of space you are renting, and how you provide services to your guests.
Before we jump into the nitty-gritty details of home sharing taxes get familiar with these terms:
Home-Sharing Reporting Terms
Personal Use Day: Any day that you or a family member use the property, or any day the property is rented at less than the fair rental price
Fair Rental Price: The amount of rent that a person, not related to you, would be willing to pay to rent your space which is equal to or above the fair market value of the property in the area.
Substantial Services: Services provided to customers for their convenience aside from services performed for the long-term maintenance of the space.
Passive Income: Income earned by a taxpayer who does not materially participate in the care or management of the property.
Active Income: Income earned by a taxpayer who materially participates in rental property in one of three ways: works more than 500 hours/year; works 100 hours/year and nobody else works more than the taxpayer; the taxpayer does the majority of the work.
Schedule E vs Schedule C
There are two forms that people use to report home sharing taxes: Schedule E and Schedule C. How you rent your residential space will determine which form your report taxes on. But how do you determine which form to file? Usually, reporting home-sharing income from Airbnb or VRBO will go on a Schedule E; filing as a real estate business goes on a Schedule C.
Reporting on a Schedule C means income is subject to self-employment tax. SE tax is a 15.3% tax used to fund Medicare and Social Security. When reporting on Schedule E, your rental activity is considered a passive investment, not subject to SE tax. There are some special circumstances where Schedule C applies. So use this as a guide for filing with a Schedule E vs a Schedule C.
Rental Property Use
What type of real estate you own is an indicator of which form to file. For taxes, the IRS wants you to classify your rental property and how you use the space.
Ask yourself these questions:
- Is it a commercial building/hotel, house, townhome, condo, or apartment?
- Is this space for personal use as a residential home or vacation home? Or only for rental use?
A space is considered a residential property if you live there more than 14 days/year. Even a vacation home is considered residential if you, or anyone else, uses it more than 10% of the total days it is rented at fair market price.
Short-Term vs Long-Term Stays
Next, you need to determine whether your rental activity is short-term vs long-term. Cumulative rental activity over 14 days is a taxable event, and factoring the length of your stays weighs into your deductions:
- Short-term rental: Average stay is less than 7 days but more than 14 days/year.
- Long-term rental: Average rental periods are more than 30 days.
If you are averaging longer stays, more than 30 days, you need to analyze the services you provide to your guests to determine whether you file on Schedule E vs Schedule C.
What Is The Masters Exemption? What Is The 14-day Rule?
The Masters Exemption is a rule that allows you to rent your space tax-free. That’s right! It gets its name from the Masters Golf Tournament in Augusta, Georgia where people will rent their residence exclusively during the tournament. The IRS refers to this safe-harbor as Section 280 (a), and it allows tax freedom for minimal rental use of a dwelling space.
How does the master exception work?
There are a couple of rules regarding Section 280 (a). You are exempt from taxes if you rent your space for less than 14 days in a year, at or above the fair rental price, and the space you are renting is your residential space. You don’t need to pay taxes on any amount of income earned during the rental period. That being said, under the Masters exception, you cannot deduct any expenses against rental income.
Remember: home sharing companies may still report the income you received, even if the 14-day rule applies. You don’t need to report the income, but you do need to keep records of the stay, especially if it was for a high dollar amount, just in case the IRS calls.
Substantial Services vs Insubstantial Services
Ruling out the type of rental space you own, and length of stays. The Schedule E vs Schedule C question now comes down to hospitality services. What types of services do you provide to your renters? While you may perform small amenities to earn more business and trust on the platform, that differs from hotel services.
Providing substantial services to guests could mean you report on Schedule C. Most home sharing rentals do not provide substantial services and report rental income on a Schedule E.
Here are substantial vs insubstantial services:
Cleaning areas while occupied (housekeeping, maid, cleaning service)
Meals & Entertainment
Tours & Outings
Cleaning common areas (landscaping, mailroom, hallways)
Paying Utilities: Heating, A/C, Water, & Trash
Repairs & Maintenance
Paying HOA Dues
How To Treat Your Rental Expenses
After you land on whether you file using Schedule E vs Schedule C, it is time to deduct expenses. There are many expenses you can deduct, against rental income:
- Auto and travel expenses
- Cleaning and maintenance
- Interest (other)
- Legal and other professional fees
- Management fees
- Mortgage interest
- Rental payments
However, there are rules on how to treat your rental expenses, circling around property use and passive rental activity.
Vacation Home Rules
Personal use days factor into how much you can deduct against your home share income. If you use the property as a residence or vacation spot then you can only deduct a certain percentage of rental expenses against rental income. The amounts you can claim on home sharing taxes are based on how many days the property was rented at fair market price, and the square footage of the property being rented. Here is how to find that number:
For Example: You own a VRBO property in Florida. Your friends rented the place for the entire month of September at a discounted rate. You and your family stayed there in December and January. It was personally used for a total of 72 days, and it was rented above fair market price for 260 days. The property features a main house (3000 sqft) available to rent on VRBO, and a granny flat (500 sqft) not available to rent on VRBO.
Dividing Expenses Between Rental And Personal Use
Days Rented % = (Rental Days / (Rental Days + Personal Days))
Days rented % = 260/ 332
Day rented % = .78
Area Rented % = Sq Footage Rented/ Total Sq Footage
Area Rented % = 3000 / 3500
Area Rented % = .86
Rental Use % = (Days %) x (Area %)
Rental Use % = .78 x .86
Rental Use % = .67
In this example, you would only be able to claim 67% of your rental expenses against your rental income. The remaining property-related expenses (Mortgage interest, property taxes, etc) can be deducted on a Schedule A.
Passive Income vs Active Income
Wait not so fast—are you a passive or active home share income earner? If you are passively earning rental income, that means that you are not materially participating in the business.
For Example: You own a home with your friend and you list it on Airbnb. However, your friend takes care of the property, arranges the stays, and manages the Airbnb listings. You earn income on the rental but less than your friend. So you are the passive earner while they are the active earner.
In this case, you can only take rental deductions against the passive income you earn. If your rental expenses exceed passive rental income then you are disallowed and must carry the excess loss over to another year. When you are an active income earner, you can take deductions of up to $25,000 against your total earnings.
Get Home Sharing Taxes For Airbnb Or VRBO Done Right
Renting on a home-sharing platform is a great way to earn. Just make sure to perform proper accounting throughout the year, and file your taxes accurately. If you are confused about how to file your taxes and you need help with your home share finances, book a consultation. We specialize in Airbnb and VRBO rental taxes.