If you rented your home on Airbnb, VRBO, HomeAway, FlipKey, Homestay or another “homesharing” website, there are rules that apply specifically to rental income that you need to be aware of. Shared Economy CPA has shared with us the 6 ways hosts are overpaying their taxes – don’t be one of them!
1. Not documenting all business expenses. Did you buy new linens for your guests? Purchase Homesharing Liability Insurance to make sure you have the legal protection you need? Buy some local art to decorate your guestroom and welcome your guest to the area? If you rented a home that you don’t live in, did you drive to the location to properly manage it? All “ordinary and necessary” expenses to operate your business are tax deductible, so make sure you look back through your bank statements and credit card bills to make sure you’re not paying tax on expenses you incurred to run your business.
2 – Not deducting the 6-12% guest service fees and the 3% host service fees. Your 1099 usually reports the gross not net income you earned, which means the total includes the commission or service fees charged to you by the company (Airbnb, VRBO etc.) that you used. Make sure you deduct the fees as these were “ordinary and necessary” expenses to run your business. (This is the most common mistake homesharers make.)
3 – Schedule E vs. Schedule C. Depending on how involved you are in managing your rental, it might make more sense for you to use Schedule E rather than Schedule C to report your income from renting your home. This largely depends on how much time you spend on the business, and if you are involved in the day to day operations. If you are using an accountant, make sure they consider which schedule will work best considering the type of renting activity you’ve been earning from.
4 – Not knowing all of the rule exceptions. Ever heard of the Real Estate Professional exception? What about the Mom and Pop Exception? If you’re using an accountant, make sure they have. If you materially participate and spent more than 750 hours running your rental, then the Real Estate Professional exception may apply to you. If you are not closely involved in managing your rental and you earned less than $100k, the Mom and Pop exception may apply and you could deduct passive losses. Not knowing these exceptions could result in overpaying on your tax bill, so make sure you’re using a professional who is familiar with them.
5 – Incorrectly classifying expenses. Your tax return preparation fees are a business expense if you are including income through your sole proprietorship, so they should be deducted under Schedule C, not Schedule A. Make sure that you’re not only documenting all of your expenses, but classifying them correctly.
We have provided these tips to you for informational purposes only. Everyone’s tax situation is different, so please contact a tax professional if you have questions specific to your personal situation. If you are planning on hiring a tax professional, take a look at the Tax & Finance services available through the Support Marketplace. Thanks again to the Shared Economy CPA for sharing their expertise with the community.
Have a specific question that wasn’t addressed here? Add your question in the forum and we’ll do our best to track down an answer for you.