WHAT IF I RENT OUT MY ROOM OR VACATION HOME?
This series of articles will focus on a question we are frequently asked at Melanson Heath: “What are the tax consequences of renting a room on Airbnb?” It’s a really great question, and one that deserves a bit of attention. Of course, all circumstances are unique and we’re happy to help you apply the rules to your specific situation.
The taxes, rules, and thresholds can get overwhelming when doing something so seemingly simple as posting a listing on sites like Airbnb (this company is being named since it has become synonymous with the short-term rental concept, but we certainly respect the use of services such as Flipkey, VRBO, HomeToGo, and others).
So where do we start? Below will give you a brief overview of the federal tax treatment of short-term rentals. In future articles, we will discuss new developments in taxing and licensing at the state level in New Hampshire, Massachusetts, Vermont, and Maine.
What is a short-term rental?
This definition depends on the state, but for federal tax purposes it typically means a room, house, or even couch that is rented to the public on a recurring basis, typically in periods of one week or less.
Generally, if you are renting the dwelling for more than 30 days on a month-to-month lease, you may be considered a long-term rental, and the tax treatment is quite different.
How do I report this income on my tax return?
Remember that for federal tax purposes, generally all income should be reported on the tax return, except for certain exceptions.
When you are considering renting your dwelling, there are a few important timeframes to be concerned with:
- 14 Day Rule (Minimal Rental Use) – If you rent out a room or dwelling for no more than 14 days, you don’t have to report the income for federal tax purposes.
- Personal and Rental Use – If you use the house yourself for 14 or more days or at least 10% of the days you rent it to another, it is considered a personal dwelling. Therefore, if you also rent the property (up to 300 days), you will need to allocate expenses. A personal use day is any day that you either use the property or you allow somebody else to use it for less than fair rental price.
- You will have to allocate expenses (mortgage, taxes, repairs, etc.) based on the personal use versus rental days. The personal use portion of deductible expenses may be allocated to the Schedule A.
- If you’re only renting a room, you will also have to allocate expenses to the room based on square footage.
- There is limitation on the ability to deduct losses on the rental of a personal dwelling.
Remember to always keep written records of rental days and personal use days, rent charged (Airbnb and other sites can help with this), and expenses.
Do I have rental or business income?
This determination really has to do with the level of service provided. If you are strictly renting a room, you may be able to be considered a rental (reported on Schedule E and not subject to self-employment taxes). However, if you are actively involved in providing “substantial services” such as meals, daily cleanings, transportation, and other hotel-like services, you will likely be considered a business (Schedule C) subject to the self-employment tax. It is important to look at the facts and circumstances of each case and consult qualified counsel.
Do I need to consider depreciation?
If a room is used primarily as a rental, you may want to consider taking depreciation deductions. Potentially, the original cost of the rental portion of the dwelling (based on square footage) could be depreciated over 27.5 years as a residential rental property. Don’t forget to also depreciate furniture and appliances that are used exclusively for the rental.
Subsequent sale of home.
When the dwelling is eventually sold, be aware that there will likely be a recapture of these depreciation deductions at your ordinary tax rates. Don’t let this scare you, but be aware of this tax implication and consult your tax advisor before selling.
In series 2, we will look at the new laws that take effect July 1, 2019 in Massachusetts which overhaul the system of registration, taxation, and oversight.