Airbnb is one of the most popular options in the newly minted “share economy.” Airbnb was founded in 2008 by three savvy millennials dealing with the sky-high rental market in San Francisco as a platform to match travelers (“Guests”) with housing owned by individuals (“Hosts”), offering affordable places to stay. “Hosts” sign up with Airbnb and manage their own bookings and are responsible for their own rental income and expenses reporting. The Airbnb site has become widely popular in ten short years, largely changing the landscape and economics for travel accommodations worldwide. According to Airbnb’s “Fast Facts,” there are nearly 5 million listings worldwide over 81,000 cities in over 190 countries resulting in over 300 million Guest arrivals! With this gain in popularity, more and more homeowners are looking to get in on the action. Along with this financial opportunity comes the challenge of how to navigate the taxation aspects of Airbnb hosting.
U.S. taxpayers working through Airbnb often have one or just a few rentals and therefore typically report Airbnb income and expenses on Schedule E (for passive rental reporting) or Schedule C (for active business reporting) of their 1040 tax return. Gross rental income reported is the total amount of payment received in rent before any related expenses are deducted. Accommodation fees received after a reservation cancellation are considered rental income. Security deposits are not considered rental income as long as they are returned to the Guest. If a portion or all of a security deposit is kept by the Host, this is reported as gross income and then offset by any related expenses (resulting in net income). Rent refunded to a Guest due to cancellation should still be reported as gross income and then offset by the related expense (resulting in net income).
Airbnb Hosts need to remember that income taxes related to their rental are generally reported on a cash basis. So, payment is reported as earned when it is received, not when the stay occurs. For example, if a payment is received in December of the current year but the renter is not scheduled until February of the next year, the payment is reported in the current year. Airbnb only provides a tax form (1099-K) to Hosts who earn a gross income of over $20,000 and have 200+ transactions in the calendar year. Even if a Host receives a 1099-K, this will not reflect any of the rental expenses. So, it is very important that Airbnb Hosts maintain excellent records to maximize their rental expense deductions.
Unlike a more traditional rental, there are important questions to consider when determining the appropriate taxation approach for an Airbnb rental.
- First, is the unit a “dwelling unit” (used for both personal and rental use) versus a rental unit used exclusively for rentals?
- Secondly, if the unit is a “dwelling,” then the taxpayer needs to ask the standard “personal use” question – “Is the unit used for personal purposes for more than greater of 14 days or 10% of the total days the unit is rented to others at a fair rental price?” If the dwelling unit qualifies as a rental under the “personal use” test, the taxpayer must consider pro-rating rental expenses if they are renting out just a spare room or a portion of their house or apartment. This is in addition to the pro-rating of expenses, all Hosts need to calculate based on the number of days rented (since typically Airbnb rentals are not year-round rentals). Remember that even personal expenses (not pro-rated to the rental) such as mortgage interest expense and real estate property taxes may be deductible as itemized deductions on Schedule A of form 1040.
Expenses for Airbnb hosts are similar to those with other rentals. Please refer to IRS Publication 529 “Residential Rental Property” for a complete list. Rental expenses could include:
- Cleaning and maintenance services
- Utilities (for example, gas, electricity, TV/cable, internet and trash services)
- Mortgage interest expense/amortization of points
- Property insurance
- Property taxes
- HOA dues
- Depreciation expense on capitalized fixed assets (subject to 2013 tangible property regulations)
- Professional fees (for example, legal and accounting)
- Airbnb service fees/collection fees
- Rental income returned under the cancellation policy
- Allowable travel expenses
Gross rental income less rental expenses equals net rental income, which flows through from Schedule E to Line 17 on page 1 of the 1040 tax return. However, if there is a net rental loss, the loss can only be taken as permitted under both the at-risk rules and the passive activity limits. The at-risk rules limit losses to the total amount you have at risk (based on the cash in the property as well as the adjusted basis of other property contributed for the purpose of the rental). Passive activity losses (such as those from rental properties) are only deductible to the extent of income from other passive activities. Excess losses are carried forward to the next tax year. However, there are exceptions for active rental real estate. Rental losses can be allowed up to $25,000 for single and married-filing-jointly ($12,500 for married-filing-separately) for modified adjusted gross income (“MAGI”) of $100,000 or less ($50,000 for Married Filing Separately). The allowance is then phased out at higher income levels and is disallowed at MAGI of $150,000 or greater ($75,000 for Married Filing-separately).
Airbnb is an international service but this article is written for domestic Airbnb hosting by individual taxpayers not using a separate entity for income tax reporting purposes (such as an S Corporation). Airbnb hosts should consider the “Exceptions to Rental Activities” as outlined in Temp. Reg. 1.469-1T(e)(3)(ii) when considering Schedule E or Schedule C for income reporting. A primary exception listed in the Regulations is that if the average period of customer use or rental is seven days or less, as is commonly the case for Airbnb rentals, reporting should occur on Schedule C (Business). However, these Regulations were issued long before Airbnb because an economic reality and further clarifications for Airbnb host income may be forthcoming sometime in the future Real estate professionals or others who are engaged in rental real estate as an active business (such as a motel owner) have additional considerations beyond the scope of this article. The information provided here is general and limited in scope.
Please consult your tax advisor with specific considerations related to Airbnb rental income tax reporting.