Since it was founded in 2008, Airbnb has been a growth rocket. During the third quarter of last year, the firm doubled revenues to $1 billion and also posted a profit. And Airbnb renters can make nice profits as well. But what happens when it comes time for renters to figure out Airbnb taxes?
No doubt, Airbnb has been a win-win for its customers. Homeowners can generate a nice source of side income and yes, the guests can get good deals as well as the opportunity to stay in nice places.
But of course, there are some drawbacks. And perhaps the biggest one is Airbnb taxes for the renters. As should be no surprise, the rules for how Airbnb income is taxed can often be complicated.
So what should renters do? Well, here’s a look at some tax tips:
Airbnb Taxes Tip #1 – Know What Income to Report
The reporting rules for income are somewhat antiquated, as they were developed before the emergence of on-demand operators like Airbnb.
Keep in mind that you will only get a Form 1099 — which discloses your gross income — if you have over 200 transactions and earn more than $20,000 for the year.
So then if you do not meet these requirements, do you need to report the income from your Airbnb? Absolutely.
The IRS may not necessarily know you received the income. But if you are selected for an audit, the agency will investigate your bank records. And if you cannot explain a deposit, you will likely have to pay back taxes, penalties and interest.
Airbnb Taxes Tip #2 – Look for Possible Deductions
The good news is that there are many potential deductions for your Airbnb taxes. Here are some examples:
- Professional photo fees
- Food and beverages for the guests
- New towels, dishes and cutlery
If there are any commissions or fees with Airbnb, you can deduct these too. You’ll find these items on your 1099.
Be sure to keep records of your expenses, including receipts and bank statements.
You might even be able to deduct items like depreciation as well as a portion of your mortgage/rent and utilities. But the process for doing this can be complicated — so it’s a good idea to get the assistance of a tax pro.
Airbnb Taxes Tip #3 – Estimated Payments
When you earn income from Airbnb, the company will not withhold any taxes. Rather, you must do this on your own by making estimated payments (the deadlines are January 15th, April 15th, June 15th and September 15th). This involves coming up with a total for federal income taxes, state income taxes and Social Security/Medicare payments.
If you fail to do so, you may owe interest penalties.
This is often not the biggest issue. When self-employed individuals do not make estimated payments, it is not uncommon for there to be an unexpectedly large tax bill when they file their annual return.
In fact, some people will not have the money to make their tax payment and will have to work out an arrangement with the IRS — such as paying them on an installment plan.
Airbnb Taxes Tip #4 – Occupancy Taxes
Occupancy taxes are taxes on the rental of rooms or properties. Such taxes are often overlooked. But you may live in a jurisdiction that has one, which can be complicated to process. There may also be a need to get a permit or a license.
To deal with all this, there is an online service, called Avalara MyLodgeTax, which streamlines everything.
Airbnb Taxes Tip #5 – The 14-Day Rule
Interestingly enough, there is a rule that exempts you from paying taxes on the income generated from an Airbnb. To qualify, you must meet two requirements: (1) you rented your home for no more than 14 days during the year and (2) you personally used the property for at least 14 days or 10% of the total days you rented it to others.
But make sure you keep records to back up your position. And remember, if the 14-day rule applies, you cannot take any deductions.
Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preperation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.