Tax Filing Requirements for Airbnb Hosts and Short-Term Rentals

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For many of the hundreds of thousands of Americans who are Airbnb hosts, the income they earn from participating in the short-term rental industry has been a life-changing experience.

Whether they use the income to help with their mortgage, pay down student loans, cover maintenance costs for their home, or save for an early retirement, they are turning their own homes into a wealth-building vehicle in a way that wasn’t possible for previous generations.

If you are thinking of joining their ranks, congratulations!  However, before you start creating your listing on Airbnb, you need to learn about the significant tax implications related to the short-term rental of property you own.

By educating yourself about what taxes you as an Airbnb host will be responsible for paying—as well as what deductions you can take advantage of—you will ensure that you fulfill all your legal obligations, avoid costly penalties, and keep as much of the rental income you earn as possible.

Local Taxes and Laws

The first thing educate yourself about is what local ordinances, if any, exist in your area related to short-term rentals.  As Airbnb exploded in popularity over the past decade, many cities and towns passed laws requiring Airbnb hosts to pay lodging taxes and put other restrictions on short-term rental activity in their jurisdictions.

The intent of these ordinances is typically meant to prevent Airbnb hosts from having an unfair advantage over hotels, and also to prevent investors from buying up residential real estate for the purposes of using it solely for short-term rentals.

While these ordinances vary from one locality to the next, they often do things such as:

  • Define what is considered a short-term rental vs long-term rental in that city or state
  • Restrict the number of days per year a property may be used for short-term rentals
  • Require owners of properties used for short-term rentals to also live in that property themselves
  • Require short-term rental hosts to obtain a business license and submit to an inspection
  • Require short-term rental hosts to pay hotel and lodging taxes to the city or town where the property is located

For example, here in Virginia’s New River Valley where our firm is located and as of the day of this posting, Blacksburg has a homestay ordinance that requires hosts to pay lodging taxes and restricts rentals to 90 days per year, Christiansburg has a homestay ordinance that does not restrict the number of rental days but requires hosts to pay lodging taxes, and Radford does not have any special rules for short-term rentals.

Separately, Virginia requires hosts to pay lodging taxes to the state government.

Also, some localities may require Airbnb hosts to pay business personal property tax on furnishings and equipment used in the short-term rental operation.

So, Airbnb hosts located within a few miles of each other could have dramatically different requirements related to local taxes.  That’s why it’s important to research the applicable laws in your city or town before listing your property on Airbnb.

In some situations, Airbnb will collect and pay lodging taxes for you.  In others, you will need to collect them yourself.  You can find out more about how lodging taxes work for Airbnb hosts here.

Federal Income Taxes

After local taxes, the next category of taxes that must be paid is federal and state income taxes.  As tax law differs in each state, we will confine our discussion here to the IRS requirements related to short term rentals.

How to report short-term rental income to the IRS

As an Airbnb host, when you file your tax return every year (or when your tax preparer files your return on your behalf), most of the time you will need to attach Schedule E to your tax return (there is one exception to this which we will discuss below).  This is where you will report all income received as an Airbnb host, as well as any deductible expenses related to your short-term rental.

The requirement to report income from your short-term rental and the deductibility of related expenses depends on several factors. First, you must consider whether personal use of the property exceeds the greater of (1) 14 days or (2) 10% of rental days. If personal use does not exceed these thresholds, the rental property is treated as rental property with personal use and expenses are prorated between personal and rental use (reported on Schedule E) based on the number of days rented at fair value divided by the total number of days the property is occupied. Mortgage interest allocable to personal use is considered personal interest and is not deductible. Real estate taxes allocable to personal use are deductible on Schedule A as itemized deductions.

If the property is rented for less than 14 days, and there is more than 14 days of personal use; the home is treated entirely as personal-use property and rental income and expenses are not reported. Mortgage interest and real estate taxes are fully deducible on Schedule A as itemized deductions.

If the property is rented for more than 14 days and personal use exceeds the thresholds above, the home is treated as a dwelling unit used as a home. Expenses are again prorated between personal and rental use. The personal portion of interest and real estate taxes are deductible on Schedule A and the rental portion of interest, taxes, etc. are not limited to rental income. Other deductions (e.g., insurance, depreciation, etc.) are limited to remaining gross income from the property.

Allowable tax deductions for Airbnb hosts

As an Airbnb host who rents out a portion of your principal residence, a vacation home, or a rental property, there are many allowable expenses you can deduct from your rental income.  You should absolutely take advantage of all these deductions—if you don’t, you could end up paying significantly more in taxes than required.

Expenses that you can deduct from your Airbnb income include:

  • Repair costs (for repairs to the part of your property being rented out)
  • Cost of equipment and furnishings you purchase for the rental (sheets, towels, bed, TV, etc.)
  • Operating costs (this could be anything from software you purchase to help you manage your listing to fees you pay someone to come and clean your listing in between renters).
  • Necessary expenses, such as utilities, mortgage interest, property taxes, insurance, etc.

Note that if you have any personal use of a dwelling that you rent out, you must divide your expenses between rental use and personal use (as discussed previously). For necessary expenses like utilities and insurance which apply to both the personal and rental use of your residence, this rule to the expenses attributable to that portion of the home (typically based on square footage), and the ratio is the days on which that portion of the residence is rented at fair rental over the days on which that portion is used for any purpose.

For expenses that only apply to your Airbnb rental, the easiest way to track these expenses is to open a checking account that you will use exclusively for this purpose.  Everything you purchase for your Airbnb should be purchased using this account, and all payments from Airbnb should be deposited in this account.

It doesn’t need to be a business checking account, but you will essentially be treating it as such.  You can even link it to bookkeeping software such as Quickbooks, which makes properly categorizing all your expenses much easier (and yes, the cost of that software is a deductible expense).

When short-term rental income is taxed as self-employed income

Above, we mentioned that Airbnb hosts will usually report their income and deductions on Schedule E.  However, there is an exception to this, which happens if an Airbnb host provides “substantial services” to his or her guests.

These would be services typically found in a hotel or bed and breakfast, such as meals, daily cleaning of the room (even during the duration of a guest’s stay), shuttle services, or substantial service.

If you do provide these types of services, the IRS will likely consider you to be self-employed, rather than someone who participates in passively renting out a portion of your property or a vacation home.  In this case, you will report your Airbnb income on Schedule C, and it will be taxed as self-employment income at an additional tax rate of roughly 15.3%.

That’s a substantial increase over what you would pay if the income is taxed as passive rental income.  So, think carefully before you start offering these types of services to your guests in an attempt to better compete with other Airbnb hosts in your area.  Any minor increase in profits you might gain from that competitive advantage would likely be negated by your higher tax bill.

Treat your Airbnb as a business

As you have probably gathered after reading this article, there is much more to starting an Airbnb than simply taking some pictures of your property and creating a listing online.

Essentially, when you become an Airbnb host, you are starting a small business.  Even if the IRS considers the income you generate to be passive rental income rather than self-employment income, make no mistake—you will need to perform all the functions that any other business owner performs.

This includes coming up with your pricing strategy, marketing your listing, doing the bookkeeping, complying with all applicable local laws, and of course paying all the necessary taxes—and this is on top of all your hosting duties, such as communicating with guests and cleaning the listing after each guest.

Don’t let any of this deter you.  The rewards of being an Airbnb host can be significant, and in many cases, hosts can cover the entire cost of their mortgage from renting even a small portion of their home.  This endeavor can be worth the time and energy, but be sure to do your due diligence as it relates to compliance with all local, state, and federal tax reporting requirements.