Do you have an extra bedroom or a granny suite that’s begging to be turned in to a rental? You could rent it as a mixed-use property, also known as shared-use property or dual-use property, to offset your housing expenses.
However, mixed-use properties carry special tax rules that affect how you account for income and deductions. Here’s what you need to know.
What is a Mixed-Use Property?
There are several types of mixed-use residential properties. Typically, you must use the property for personal purposes and as a rental to fall under a mixed-use classification.
The rental income can come in several forms. For example, you have a vacation rental you only use in the summer and rent for the remainder of the year. Or, you rent a portion of your property, such as an extra room or granny suite.
Shared Use
A common example of a mixed-use property in this category is a duplex.
Many duplex owners live in one of their units and rent the other to tenants. Larger multifamily properties can also fall under this classification, as long as the owner lives onsite and rents out the remaining units.
The owner resides on the property and rents part of it out. As a result, deductions must be allocated according to the property’s percentage of business use.
The same goes for renting out a room in your home. Any business deductions would have to account for the mixed-use.
Part-Time Use
If you own a vacation home that you rent out, you also have to consider the property as mixed-use, but the rules differ slightly.
Let’s say you use the property in the summer for vacation and personal enjoyment, and you rent it out in the off-season to generate income when you’re not using the property.
Websites such as Airbnb and VRBO have popularized this type of mixed-use scenario, and the tax rules are slightly different.
What are the IRS Criteria for Mixed or Dual-Use Properties?
To figure out if your property counts as a mixed-use property, you first need to determine whether the IRS considers the property a residence.
The IRS criteria for a residence requires you to use it for the either 14 days a year or 10% of the time the property is rented, whichever is greater. For example, if you rent out the property for 250 days a year, you need to use it more than 25 days for it to qualify as a residence.
It’s also worth noting that you can have multiple residences in a given year.
In addition, you can only count rental days if the property was rented at a fair market rate. For example, if you rent to a friend for $20 per day to cover your costs while you list your house for $200 per day on Airbnb, it’s considered a personal use day; not a rental day.
Furthermore, if you rent your property for less than 14 days a year, the rental income is not taxable.
Tax Rules for Mixed-Use Airbnb Properties
For properties used exclusively as rentals, you can deduct all associated expenses for the property, including insurance, housekeeping, mortgage interest, HOA fees, etc. When you have a mixed-used Airbnb property, the rules are more complicated.
Airbnb hosts must pay special attention to their personal and business use of the property each year to determine whether mixed-use rules apply to them.
If the property qualifies as mixed-use, you must allocate your deductions according to each property’s business use.
You must also determine whether your mixed-use property expenses fall under whole-home expenses and direct rental expenses. Each type has different deduction rules.
Here are some examples of each type of expense and how to treat them on your tax return.
Whole-Home Expense
Some expenses apply to the entire property, both for personal and rental use. Examples include mortgage interest, real estate taxes, insurance, and utilities.
You must allocate whole-home expenses like these based on the ratio of personal to rental use.
For example, if you rented a room in your house for the entire year, you can allocate your expenses based on the percentage of your floor space being rented.
So, if your rental room is 300 square feet and your house is 1,500 square feet, you can deduct 20% of your whole-home expenses.
If you’re renting a vacation home for a portion of the year, you can also base your deductions on the exact expenses for the rental period.
So, if you rented your house for 9 months, you can deduct all the whole-home expenses incurred during that period.
Rental-Specific Expenses
Some expenses are specific to rental operations and, as such, are fully deductible because you wouldn’t normally incur these costs if you weren’t using the property as a rental.
Rental-specific expenses include cleaning services between guests, gifts, and snacks for guests. Streaming service subscriptions dedicated for renter use also qualify, as do business licenses required for rental units.
Shared Expenses
Expenses that you would normally incur but are increased because of your rental may need to be partially allocated to the rental, but you calculate them differently than whole home expenses.
For example, if you have to increase your internet speed to account for the increased usage, the additional expense can be deducted as a business related.
Likewise, if you share a streaming service with renters, you can allocate a portion of the expenses based on your usage versus your guest’s.
Other Tax Considerations
There are additional considerations for mixed-use properties that you may want to consider.
Home Office Deductions
Using your property as a mixed-use rental can impact your home office deduction because you are allocating some of your expenses to the rental. You should take this into consideration, especially if you rely on a home office deduction to reduce your business income.
Home office deductions for mixed-use properties depend on the amount of time you spend working at a given office.
For example, if you spend three months out of the year working in your seasonal vacation home, you must account for time spent working in alternative offices when calculating home office deductions for your vacation property.
If you work in several locations, you’ll need to allocated your expenses to each property according to the percentage of the time you spent working in each location.
Obviously, calculating home office deductions can get very complicated when you split time between multiple locations.
For a more exhaustive explanation, check out our post on advanced home office deduction strategies for Airbnb hosts for more info.
Remote Work
If you have vacation homes in other states, you must determine whether you’re generating source income for each state.
States have various criteria for determining whether remote work income is taxable, and you need to take these rules into account at tax time.
Are Dual-Use Properties Worth the Hassle?
Dual-use, shared-use, or mixed-use properties come with accounting challenges and tax implications that may seem daunting at first. However, there’s no reason to let bookkeeping stop you from tapping into a potentially lucrative revenue stream.
Always remember that maintaining accurate, adequate records is the number one priority for mixed-use property.
These records will be your only defense in the event of an IRS inquiry, so don’t take them lightly. to back up your allocation for various types of expenses. Take care to avoid tax issues that could land you in trouble.
Specialized Tax Guidance for Airbnb Hosts
Our team at Shared Economy Tax specializes in serving the Airbnb host community. We understand the sharing economy’s challenges and nuances better than anyone else, so we can help you solve tax problems you didn’t even know you had. Get started today with a one-on-one strategy session with a Shared Economy Tax pro and see how much time, money, and aggravation you can save.
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