Dear Clients and Friends,
If you lease your home to someone for a week or two through Airbnb or any other short-term rental service, do you have to report the income on your taxes?
Maybe! The answer can be complicated.
In general, the key question is whether you lease your home in this way for more than 14 days a year. If you do, then you have to report all of your rental income on your federal income taxes.
That’s true even if you lease the home for less than 14 days at a time – so if you lease it for a week in February, a week in June, and a week in September, you will have to report all the income.
The good news is that you may not have to pay tax on all the income, because you can deduct your rental expenses. You have to pay tax only on your net income, or profit.
You can even count a portion of your mortgage interest and property taxes as rental expenses. However, you have to figure out what proportion of your interest and taxes is attributable to the rental period, and you may have to report the different amounts on different tax schedules, which can be complex.
In general, if you lease your home for 14 days or fewer, you don’t have to report this to the IRS and you don’t have to pay any federal tax.
However, you might still have to pay state tax. Different states have different names for this tax. For instance, in Texas, if you rent your home for less than 30 days, you might have to pay a hotel occupancy tax. In California, it’s called a transient occupancy tax, and in Florida it’s a tourist impact tax.
New York’s attorney general recently subpoenaed Airbnb for the names of some 15,000 people who leased space in New York City through the service, as part of a plan to collect additional taxes.
Even if you don’t owe any tax, you should be aware that Airbnb and some other short-term rental companies routinely send 1099 forms to the IRS saying how much you received as rental income. Because the IRS has no way to know whether you rented your home for more or less than 14 days, it will often flag a “discrepancy” if it gets a 1099 form but you don’t report any rental income on your return. It will then send you a letter demanding an explanation.
That’s why it’s important to keep careful records of your short-term rentals even if you rent your home for only a few days a year. You need to be able to prove to the IRS that you rented the home for 14 days or fewer and thus owe no federal tax.
Some people even send a statement with their federal tax returns saying that they rented their home for 14 days or fewer. However, it’s not clear this will help, because the IRS computers might not be able to make the connection and prevent a letter being sent to you.
Do check in with us on our free phone evaluations of your or your friends tax, and real estate legal matters.