Sum and Substance: Admittedly, reconciling rental property taxes isn’t the most complicated tax issue, but it’s not a walk in the park either. This week's post will look at short-term rental tax issues. We'll explore how this complicated tax topic can be simplified in a useful way. As a bonus, I provide some tax saving tips at the end.
It’s fall in the Pacific Northwest and that means two things: rain and leaves. Raking dry leaves is one thing, but raking wet leaves is altogether different. It’s boring and frankly, something I don’t look forward to doing. There are a whole lot of things I would rather do instead. Managing the tax side of rental property can, at times, feel like raking up wet leaves. There are a slew of tax issues to deal with: from claiming income and expenses, taking depreciation, recognizing loss, filing the correct forms, and calculating estimated tax payments (your rental income could be subject to both income and/or self-employment taxes).
So you don’t feel like you’re raking wet leaves, I am going to show you a much simpler process to handling your rental tax issues. All it takes is doing two things: answering a few question and then following a few rules. To help here, I have put together an infographic to make this an easy process. (See below.)
Whether you use Airbnb, HomeAway, VRBO or any other service to rent out your home (or a room in your home), this two-step process can make reporting the tax side of your rental much more manageable.
Rental classification is the first part of the two-step process. Let’s start there.
Do you have Rental or Residential property?
This distinction is important because everything from how you claim income and expenses to when you take a loss and deduct depreciation, largely depend on whether it’s rental or residential property. The test is simple: Did you personally use the rental less than the greater of 14 days or 10% of total rental days? If yes, it’s rental. Otherwise, it’s residential.
Next, you’ll need to determine if there is personal use of the rental. You can skip this question if you have residential property.
Do You Personally Use the Rental?
If you never personally use the rental, it’s Rental No Personal Use. Otherwise, it’s Rental Personal Use. If you have either type of “Rental” you can stop here and find the tax reporting rules for your rental in the infographic below. If you have residential property, then you have one additional question to answer.
Did You Rent the Residential Property for 15 Days or More?
If true, the rental is classified as Residential Rental. Otherwise, it’s classified as Residential. This is important because if it’s residential you can exclude the income (and no deduction is allowed for expenses) if rented out for less than 15 days.
By answering three questions, you have properly classified your rental. The last step of the two-step process is applying the tax reporting rules for your classification.
Which Rules Apply?
Here is where the infographic shines. Based on your classification, find the column in the infographic that matches your classification and follow the rules.
Hopefully, this two-step process has helped simplify an otherwise complicated matter. To conclude, here are the key takeaways and a few helpful tax tips.
If you have something to add or share on this post or home sharing taxes in general, head on over to Homeshare Tax Forum and continue the discussion.
- There are 4 rental classifications:
- Rental No Personal Use
- Rental Personal Use
- Residential Rental
- Unless you meet an exception all rental income (cash, 1099-K) must be reported.
- Do not claim income or expenses and do not take depreciation or loss on a Residential rental.
- If substantial services (such as changing linen daily, providing meals, transportation etc.) are provided with rental, income may be subject to self-employment tax.
- If no substantial services are provided with rental, file schedule E. Otherwise, file schedules C and SE.
- Deduct depreciation only on Rental No Personal Use property.
- If rental expenses are more than rental income, the loss can be deducted without limitation against other income for Rental No Personal Use or Rental Personal Use property.
- Rental income from all sources may be subject to quarterly estimated taxes.
Key Tax Tips
- Be meticulous with record keeping. Have a system to account for, and track, all expenses. Lost expenses are lost deductions and lost savings.
- Listing fees you pay to a home sharing service are fully deductible.
- If you have a room or dedicated space used exclusively to administer and manage your rental business, the expenses associated with that room or space are fully deductible.
- Advertising, cleaning, and maintenance fees directly related to the rental are fully deductible.
- The portion of utilities, interest, and taxes directly related to the rental are fully deductible.
- Purchases such as linen, toiletries, curtains, or food you provide to your guests are deductible.
- A portion of trash removal costs you pay related to the rented space is deductible.
- The costs (cash, loan, or loan interest) of improvements made to the rental (painting, installing new carpet, or replacing window treatments) are deductible.
- Rent your residence for 14 days or less and pay no income tax on the income.
- Avoid self-employment tax by not providing extras like: cleaning the rental while it is occupied, concierge services, tours, meals, entertainment or transportation.