Rental Tax Treatment of Home Sharing

Christian Samara, CPA (Dec, 2019)

If you are like many American's today, you may have considered getting into the rental real estate arena to supplement, or possibly replace, your primary source of income. While owning separate rental property has long been an attractive prospect, there is a new player in the rental real estate game, home sharing. Put simply home sharing is when individuals rent out their homes, or portions of their homes, on a short term basis to individuals traveling or vacationing in the area. Popular internet platforms like Airbnb or HomeAway have become household names, making it easier than ever for individuals to list their properties and match them with guests.

Home sharing appeals to many taxpayers as a way to generate supplemental income and to serve as a stepping stone into owning and managing rental real estate. Despite services like Airbnb that make the actual listing and renting of your home simple, the tax consequences of home sharing can often leave taxpayers feeling a little lost. Common taxpayer questions like "How do I report this income" and "What expenses can I deduct on my tax return" are among the most common.

First, we must look at how the home sharing activity is classified. It may seem like common sense that any home sharing activity would be classified as a rental activity and fall under the typical tax rules for reporting rental income and expenses. They can also be classified as a trade or business activity. There are several rules in place that need to be followed before your home sharing can be classified as a rental activity. To be rental it must be used more than seven days with no significant personal services provided, or more than thirty days regardless of the services provided.

We must then consider the definition of significant services. Common examples not considered significant personal services are: services to keep the property up to code, services to repair or improve the property beyond its existing service life, and common long-term rental services (such as cleaning, maintenance of common areas and routine repairs). Significant services are considered to be rendered if they are primarily for the convenience of the occupant, and are other than those typically provided in connection of the rental of rooms for occupancy only. These include providing food, exercise equipment, furnishings, and laundry services.  They are disqualified when the rental happens greater than seven days, but less than thirty days.

To add even more complexity to classifying home sharing activity as rental activity, the IRS places special rules for rental activities involving taxpayer's residences. These rules apply if the personal use of the residence exceeds 14 days and 10% of the rental days. These rules effect the portion of expenses that become deductible, which will be discussed later. Also worth noting, if the residence is rented for 14 days or less in a year, all rental income may be disregarded and does not need to be reported.

There are other less commonly encountered criteria to be made aware of that could also preclude your home sharing from being classified as a rental activity. Among these are extraordinary personal services, where the use of the property itself is only incidental to the services received, incidental rental of property being held as business investment property, and property that is made available regularly during non-business hours to various parties or business partners.

There are tax consequences using a rental classification of your home. Rental activity is considered a passive activity even if it was materially participated in, if the taxpayer is not a licensed real estate professional. Taxpayer's passive losses can only be deducted against passive income. Generating passive income from home sharing activities can be advantageous to individuals with passive losses from other activities that could not be deducted previously. It can be disadvantageous if your home sharing activities generate losses, which may be non-deductible.

Rental income is defined as rents received or accrued for the occupancy of real estate for the use of personal property. Rental expenses are necessary to the related production of rental income, and the maintenance and preservation of the rental property. Common examples include cleaning, maintenance, repairs, utilities, property taxes, and mortgage interest. When only a portion of a home is rented certain expenses, such as mortgage interest, are usually allocated based on the square feet of the rental space compared to the entire home, or the number of rooms rented compared to the entire home.

If the property is rented for more than 14 days, rental expenses are further limited using a ratio of rental days to total days of use. IRC section 280A(c)(5) further limits these proportional deductions to rental income, in a specified order. First, the applicable portion or mortgage interest and property taxes are deducted, followed by indirect expenses (other than depreciation), then ending with depreciation. Once income and deductible expenses are calculated, they are reported on the Schedule E of the taxpayer's Form 1040.

Home sharing is an attractive source of additional income. There are many rules and regulations regarding the reporting of income and expense of home sharing that need to be taken into consideration. The rules above describe the basics of reporting home sharing as a rental activity. If you are considering starting home sharing, disciplined recorded keeping is of the utmost importance, as well as consulting your local tax advisor throughout the process. If you have any questions or concerns about the tax treatment of home sharing, please do not hesitate to contact your tax advisor.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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