The gig economy isn’t going anywhere anytime soon: whether you’ve got an extra seat in your car for the night or a powerdrill you’d like to put to use, the whole world of app-driven side hustles has helped people pay their bills or even serve as stopgaps for career changes. And the tax authorities have certainly noticed as the IRS even launched a sharing economy tax center in recent years given how prevalent the gig (or sharing) economy has become.
Casual rental income such as being an Airbnb host or listing your home on VRBO is a hot-button issue that the IRS has been paying close attention to. Casual rental income stands out from the other well-known forms of gig work like driving for Uber or delivering food for Grubhub. Why? Driving, doing deliveries, and other forms of gig work are considered self-employment, whereas rental income entails a whole other set of rules. The rental income rules are then dissected into renting out your principal residence where you live, renting out a second or vacation home, or investment properties purchased specifically to earn rental income. Most Airbnb, VRBO, and Craigslist casual, short-term rentals fall under the "living in principal residence" guidelines most of the time.
Do I Need to Report Casual Rental Income Even if I’m a Renter?
Yes. If you are subletting your apartment regularly to travelers or other people who are giving you money for that extra room (or even your couch) then you need to report the income.
Good News if You Rented Out Your Primary Residence and Didn’t Like Being a Host for Long
Did you decide that being an Airbnb host just wasn’t for you after trying it out for a few days? There’s some good news: you don’t actually have to pay the tax on the rental income if you rented your primary residence out for 15 days or less. It doesn’t matter what platform you used or if you informally listed a room for rent for a few days on Craigslist or the newspaper: if you rent out your primary residence for 15 days or less during the tax year, this is tax-free income.
You may receive a 1099 form if you used a platform like Airbnb and received $600 or more. You would then report the income on your federal tax return, but then also claim an adjustment on your return which means it wasn’t actually taxed. If you receive a 1099 and don’t report the income, you may get a notice from the IRS so you should produce records that prove you meet the exception for renting less than 15 days. It doesn’t matter if you own or rent the property, so long as it is used as your primary residence you will qualify.
However, if you have a vacation home or rental property, then you would need to report all of the income regardless of how many days it’s rented out. The rest of this post assumes that you are using your primary residence given the large amount of Airbnb and VRBO users who have found themselves reliant on the income from casually renting out the homes they actually live in.
How to Report Your Casual Rental Income
For more good news, you can deduct some of the expenses associated with your income from being an Airbnb host or doing other short-term, casual rentals of your primary residence. The bad news is that you need to prorate these expenses according to how many days your home was used for this activity, and you also can’t deduct a loss resulting from these expenses. Your loss is limited to the casual rental income you received, so the income just gets canceled out to zero at best if your living and hosting expenses are high.
Additionally, you also must allocate the expenses based on the square footage or percentage of your home used for rental purposes. This is referred to as indirect expenses that affect the entire property, such as utilities, the mortgage, and real estate taxes. Direct expenses, like painting or cleaning a room that you specifically set aside from rental would be 100% deductible. Anything related to the collection or generation of rental income like advertising and property management is also 100% deductible, along with any amenities you purchase specifically for guests.
The following types of expenses are deductible:
- Mortgage interest
- Depreciation (the actual purchase price of your home)
- Rent, if you’re a renter
- Real estate taxes
- Utilities (heat, water, electric, gas, cable and Internet)
- Cleaning and maintenance services
- Management fees (if a friend or professional property manager is being paid to let people in and out if you are not home for your guests)
- Advertising or featuring listings
- Amenities (e.g. towels and linens for guests)
- Fees the platform charges
If you are renting out a single room or area of your home that can be measured in square footage, you need to prorate by this area first. Using the IRS’ example of an 1,800 square foot home that uses a spare bedroom that is 12 x 15 feet (180 square feet, 10% of the home) that is the first number you will need. If your homeowners’ insurance is $500 per year, you start with a $50 deduction based on 10% of your home being rented out.
Next, since this is your primary residence being rented out, you need to prorate by the number of days that the room is for rent. Going back to the example the IRS provided, you use an app like Airbnb and have a paying guest for 73 days which is 20% of the year. 20% of your $50 prorated insurance deduction comes to $10. You unfortunately can’t deduct the $490 left over.
If you are renting out your entire home on a sublet basis or just to get some extra cash while you’re not at home, you would need to then just prorate the expenses by the number of days you are renting it out.
Pitfalls if You Own Your Home
Even if you meet the exception for renting out your home for less than 15 days, you need to apportion your mortgage interest and real estate taxes to those days that they were rented out if you deduct the interest and taxes on Schedule A.
Depreciation of your home, which is the actual principal, can also be extremely tricky to calculate without a tax professional’s help. If you sell the property before the depreciable life is over (which is 39 years for commercial property, which is what rental property is classed as- even if you live in it!) you may need to pay what is called a recapture tax at the time of sale. The recapture may or may not be worth the benefit of taking that deduction now.
Are You in the Vacation Rental Business?
Be careful with how much additional work you do for your guests beyond providing them a place to sleep. If you’re cooking meals for them, doing more than a cursory cleaning, or providing additional services then the IRS could classify this as being in the trade or business of vacation rentals or bed-and-breakfast. This would mean that you have to pay self-employment tax- Social Security and Medicare taxes that are 15.3% of your net income- and possibly apply for additional licenses and occupancy tax certificates where you live or rent out the property.
As home sharing becomes more ubiquitous over time, Congress may update the tax code for simplified treatment of sharing economy income and the IRS subsequently release more detailed guidelines. Nevertheless, be mindful of your expenses as well as how many days your home is used for casual rental, in order to avoid headaches at tax time.