November 5, 2020
Renting Your Home or Vacation Home for Short Periods
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Even if you rent out your property using rental agents or online rental services that match property owners with prospective renters (such as Airbnb, VRBO or HomeAway), it is still your responsibility to properly report the rental income and expenses on your tax return.
Special (and sometimes complex) taxation rules can make the rents that you charge tax-free. However, other situations may force your rental income and expenses to be treated as a business reported on Schedule C, as opposed to a rental activity reported on Schedule E.
The following is a synopsis of the rules governing short-term rentals.
Rented for Fewer than 15 Days During the Year – When a property is rented for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. Interest and property taxes are not prorated, and the full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions (as usual) on the taxpayer’s Schedule A.
The 7-Day and 30-Day Rules – Rentals are generally passive activities, which means that losses from these activities are generally only deductible up to the amount of gains from other passive activities. However, an activity is not treated as a rental if either of these statements applies:
If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated mortgage interest and real property taxes, will be reported on Schedule C. IRS Publication 527 states: “If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C.” Substantial services do not include the furnishing of heat and light, the cleaning of public areas, the collecting of trash, or other such general amenities.
Exception to the 30-Day Rule – If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as public area cleaning and trash collection), and if the rental also includes maid and linen services that cost less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the purposes of the 30-day rule.
Profits and Losses on Schedule C – Typically, if you own and operate a business that isn’t set up as a corporation, the income and expenses of your business would be reported on Schedule C as part of your income tax return, and you would pay self-employment tax (Social Security and Medicare taxes), as well as income tax, on the profit. However, if you have a profit from a rental activity, it is not subject to self-employment tax even when reported as self-employment income unless you are a real estate dealer. If you have a loss from this type of activity, it is still treated as a passive activity loss unless you meet a material participation test—generally by providing 500 or more hours of personal services during the year related to the rental or qualifying as a real estate professional. Losses from passive activities are deductible only up to the passive income amount, but unused losses can be carried forward to future years. A special allowance for real estate rental activities with active participation permits a loss against nonpassive income of up to $25,000. This phases out when modified adjusted gross income is between $100K and $150K. However, this allowance does NOT apply when the activity is reported on Schedule C.
These rules can be complicated; please call this office to determine how they apply to your particular circumstances and what actions you can take to minimize tax liability and maximize tax benefits from your rental activities.
- Airbnb, VRBO, and HomeAway
- Rented for Fewer than 15 Days During the Year
- The 7-day and 30-day Rules
- Exceptions to the 30-Day Rule
- Schedule C Reporting
Even if you rent out your property using rental agents or online rental services that match property owners with prospective renters (such as Airbnb, VRBO or HomeAway), it is still your responsibility to properly report the rental income and expenses on your tax return.
Special (and sometimes complex) taxation rules can make the rents that you charge tax-free. However, other situations may force your rental income and expenses to be treated as a business reported on Schedule C, as opposed to a rental activity reported on Schedule E.
The following is a synopsis of the rules governing short-term rentals.
Rented for Fewer than 15 Days During the Year – When a property is rented for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. Interest and property taxes are not prorated, and the full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions (as usual) on the taxpayer’s Schedule A.
The 7-Day and 30-Day Rules – Rentals are generally passive activities, which means that losses from these activities are generally only deductible up to the amount of gains from other passive activities. However, an activity is not treated as a rental if either of these statements applies:
A. The average customer use of the property is for 7 days or fewer—or for 30 days or fewer if the owner (or someone on the owner’s behalf) provides significant personal services.
B. The owner (or someone on the owner’s behalf) provides extraordinary personal services without regard to the property’s average period of customer use.
B. The owner (or someone on the owner’s behalf) provides extraordinary personal services without regard to the property’s average period of customer use.
If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated mortgage interest and real property taxes, will be reported on Schedule C. IRS Publication 527 states: “If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C.” Substantial services do not include the furnishing of heat and light, the cleaning of public areas, the collecting of trash, or other such general amenities.
Exception to the 30-Day Rule – If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as public area cleaning and trash collection), and if the rental also includes maid and linen services that cost less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the purposes of the 30-day rule.
Profits and Losses on Schedule C – Typically, if you own and operate a business that isn’t set up as a corporation, the income and expenses of your business would be reported on Schedule C as part of your income tax return, and you would pay self-employment tax (Social Security and Medicare taxes), as well as income tax, on the profit. However, if you have a profit from a rental activity, it is not subject to self-employment tax even when reported as self-employment income unless you are a real estate dealer. If you have a loss from this type of activity, it is still treated as a passive activity loss unless you meet a material participation test—generally by providing 500 or more hours of personal services during the year related to the rental or qualifying as a real estate professional. Losses from passive activities are deductible only up to the passive income amount, but unused losses can be carried forward to future years. A special allowance for real estate rental activities with active participation permits a loss against nonpassive income of up to $25,000. This phases out when modified adjusted gross income is between $100K and $150K. However, this allowance does NOT apply when the activity is reported on Schedule C.
These rules can be complicated; please call this office to determine how they apply to your particular circumstances and what actions you can take to minimize tax liability and maximize tax benefits from your rental activities.
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