A short term rental listing with Airbnb or other site can be a really good gig, especially if you are willing to put in the work and really make your guests feel welcome and accommodated. However, when that hard work starts to pay off and you start raking in the dough, the IRS wants a piece of the pie as well. You are probably aware that the IRS wants all income reported and applicable taxes paid. So, as part of your due diligence, you are including your Airbnb income on your tax return and paying the toll. However, have you considered that you could be overpaying your Airbnb taxes? Here are some things to think about, and how you could avoid overpaying your Airbnb taxes.
Airbnb & VRBO Tax Reporting
As we mentioned above, the IRS wants all income reported on your tax return. The income from Airbnb is no different and should be treated as 1099 income. In fact, if you reach more than 20K and 200 transaction in a year, Airbnb will submit a 1099-K. It is crucial, that what you report to the IRS matches what Airbnb reports on your 1099-K. Any discrepancies could result in costly penalties and fines.
There is one exception to reporting your Airbnb income to the IRS, and it’s the 14 day rule. The 14 day rule stipulates that if you rent your short term rental out for 14 days or less per year, and use the property yourself at least 14 days per year or at least 10% of the total days you rent to others, the income does not need to be reported. If you are renting a room out in your home, the 14 day rule still applies.
Deductions For Your Airbnb And VRBO Business
Deductions are a great way to lower your tax bill, and they also apply to your Airbnb taxes. An Airbnb listing is after all a business and therefore has necessary business expenses that can qualify as deductible expenses. Some of these deductions include:
- Utilities – this includes: water, gas, and electricity. If you are only renting a portion of your home out, you will have to split your utilities with your personal use and business use. Only the business portion can be deducted.
- Insurance – part of your homeowners insurance can be written off, this includes any additional insurance you are required to obtain because of your business.
- Property taxes – a portion of your property taxes can be deducted as well, again the is an expense that is split between personal use and business use.
- Maintenance – do you pay for a cleaning service? Did you have to make any major repairs or improvements? These costs can be deducted.
- Subscriptions – do you pay for a Netflix or Hulu subscription to make your guests stay more comfortable? This cost can be deducted.
- Marketing – marketing and advertising are deemed necessary business expenses, and therefore qualify as deductible expenses.
- Furniture and household goods – if you purchased new furniture or new linens for your rental, these costs can be deducted.
- Service fees – you can deduct the service fee Airbnb or other home sharing sites charge.
Tax Saving Tips & Tax Planning
Tax saving and tax planning can lessen the burden of your Airbnb taxes. It is a good idea to set aside a certain portion, say 30%, of your Airbnb income into a separate account just in case a tax rainy day comes along. This provides a little cushion in the event you owe money at the end of the year.
In addition, it is a good idea to know if you are required to pay estimated taxes. Since the money is not being deducted from your income by an employer, the IRS still wants regular tax payments on quarterly basis. If you are expecting to owe over $1,000 in taxes, then you will be required to pay estimate taxes. Estimated taxes are part of tax planning. Remitting estimated taxes can help lower your stress and reduce the sticker shock you may feel at the end of the year. However, if you are a W-2 employee you can eliminate your estimated tax obligation by having your employer withhold more from your paychecks.
Lastly, contributing to your IRA can be a huge benefit when it comes to your Airbnb taxes. The IRS allows taxpayers to deduct up to the contribution limit. Last year the contribution limit was $5,500 this year it has increased to $6,000. You have until April 15 to make a contribution for the previous year, so if you are looking for an extra deduction, your IRA is an excellent source.
Working with a tax advisor can help give you an edge where you need it most, saving on your taxes. To learn more about Airbnb taxes and other tax saving strategies contact Shared Economy CPA today!