by Bill Sweet
Yes.
Well, most of the time, if you rent your home for 15 days out of the tax year or more. I hope that it isn't a shock to anyone receiving income for renting their home that the taxing authorities would be interested in the details!So let's start with the good news: if you rent your home for LESS than 15 days (e.g., 1-14 days), AND you use your home for personal use for more than 14 days (usually the case), your rental income is not reportable as taxable income. That's huge!
Here's the relevant portion of the tax code, from Section A280:
So as long as you're using the "dwelling unit" as a residence for the tax year, you can safely choose not to report any income from renting your home. Note that also outlined in A280 (g)(1) is that you also cannot deduct any expenses related to the activity (sorry - can't ignore the income but report expenses, that usually fails). The actual full definition of what the IRS considers a dwelling unit is "real property [e.g., land] improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including sleeping space, bathroom, and cooking facilities." So it would be interesting to find out if a mobile home would qualify - I'm honestly not sure.
Things get more complicated once you cross the 15 day threshold. At that point, the income that you receive for renting your property is considered business income and it is reportable and taxable. You will need to file this, most likely using Schedule E of your Form 1040. The IRS will treat your rental income as a business, and you should therefore approach your recordkeeping in a business-like manner to avoid any unnecessary taxes and/or penalties.
Note that you probably want to avoid providing substantial services in connection with a guest's stay, like breakfast, as in a bed-and-breakfast. This is a super nice thing to do and I'm sure that your guests will thank you, that would likely prohibit you from claiming that your rental activity is passive and move it into the active income arena, subjecting you to an additional self-employment tax (usually 15.3%) on top of income tax. So be careful opening that chestnut.
The good news is that in either scenario you can and should deduct reasonable, ordinary, and necessary expenses related to that business, and these can offset your income. It is important as well that you are able to substantiate every single business deduction - this usually means a bank or credit card record PLUS a receipt of some sort as evidence. You will probably not need both on-hand when you file your tax return, but it is a really, really good idea to accumulate and organize your records as you go, because finding receipts after the fact is a time-consuming and sometimes impossible task.
Expenses are split into two rough categories - direct expenses related to the business (fees paid to Airbnb, advertising fees, expenses exclusively for the use of the guest room, such as soap or towels), and indirect expenses related to your home (electricity, heat, water, condo or HOA fees, cleaning, trash removal, maintenance, repairs, rent, mortgage interest, real estate taxes). Direct expenses can be applied, well, directly. Indirect expenses generally must be totalled for the year and then used against the business pro-rata. For example, if you rent half of your house for 182 days a year, and your rent is $10,000 for the year, 50% of the rent is deductible (for one half of the house), reduced by another 50% for the fact that you only rented for 1/2 of the year, leaving $2,500 as a business deduction for rent.
If this is confusing, slow down and focus on keeping good records. A good tax professional can help you sort out all of the details and make sure that you're not missing any deductions, but you need to be able to prove that you spent something. So the most important thing to note is that you need to get in the habit of keeping good records if you expect to rent your house out for more than 14 days. It's probably a good idea to have a solid recordkeeping system ready from the start, just in case the IRS comes calling.
- Bill
