I just started renting my house out on Airbnb. I started a limited liability company to keep the expenses separate from personal ones. I am trying to figure out what would be considered tax deductions in this scenario?
I had my own marketing research LLC for around 25 years, so I know a lot — just not with renting out my house. Can somebody count part of the mortgage as a deduction? What about utilities and cable? I would think so.
Travel & Taxes
Dear Travel & Taxes,
Your question about the crossroads of hospitality and regulations has this line from The Eagles’ “Hotel California” running through my head: “You can check out any time you like, but you can never leave.” You can never leave tax rules, that is.
There’s always a tax question to be answered, and your budding Airbnb business is no exception. You can make rental income deductions in certain circumstances, so long as you know what to claim, how much to claim and when not to claim.
The Internal Revenue Service says rental owners may deduct mortgage interest, property tax, operating expenses, depreciation, and repairs. The cost of “improvements” are not deductible — though some or all of the improvements may be recovered through depreciation.
“The IRS says rental owners may deduct mortgage interest, property tax, operating expenses, depreciation, and repairs. ”
spokesman pointed to a link on the company’s site, which includes an EY explainer on the topic of hosts’ tax obligations. Also count utilities (like gas, electricity, TV and internet), cleaning services, advertising as some of the other deductible expenses, the document said.
The Airbnb link said it would be a good move to check with tax professionals for more specifics because there are “many special rules in this area.”
June Toth, managing member of zbt Certified Public Accounting & Consulting in Edison, N.J., is based close to mountains and beaches and, thus, regularly receives client questions on rental income. Your tax deductions could fall depending on your own living arrangements.
If you are renting a place where you also reside — a dryly termed “dwelling unit” — there will be limits for the deductible rental expenses, the IRS says. The tax agency says it will consider you using the property as a personal residence rather than a rental if you use it for 14 days or “10% of the total days you rent it to others at a fair rental price.”
“If personal use doesn’t exceed these thresholds, then the property is deemed rental property” and deductions can follow, Toth said.
“If you are renting a place where you also reside — that is, a ‘dwelling unit’ — there will be limits for the deductible rental expenses.”
Putting it a different way: If you rent your property out for 14 days and under, you do not have to report the rental income, Toth said. But that means you can’t deduct expenses connected with the rental either, she added.
Let’s assume you are renting this place out for 15 days or more. You sound serious. You’ve already created an LLC. You’ll have to report the rental income on Schedule E and split your deductions between the personal home-related expenses and the rental-related expenses.
So how do you divide? The IRS says, “You generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose.”
That means tallying up the eligible expenses, Toth said. Count the days when the place was actually being rented out, plus the days you had it for personal use.
The rental side of these expenses is deductible against your rental income. Mortgage interest and property taxes are the first to be applied, Toth said. The operating expenses and rental depreciation are applied next, she said. Any net loss gets carried to future years, she noted.
Finally, supporting records do not have to be included in a tax return, the EY explainer said. But people should hold onto their records — even those who don’t have to report rental income due to the 14-day exception — if the tax man comes knocking.
These include receipts of deductible expenses and repairs, logs of days when the property is rented or personally used, proof of advertising and more.
The IRS will be looking for records if you get picked for an audit. If you have your documents ready to prove your expenses and deductions, the quicker you will be done with the audit.
To quote The Eagles again, being done with that process counts as a “peaceful easy feeling.” I wish that for you.
Got a tax question? Write me at: email@example.com
Thanks for reading. I want to help you think more broadly about the issues that affect your taxes. I’m not offering tax advice, just an attempt to look at what the swirl of tax rules and economic conditions could mean for your wallet.
I’m here for the reader who faces their taxes with an air of resignation. You’re just not that into taxes, I get it. I was once that guy. Underneath the jargon, think of your taxes like a maze — with money at the end. Or a trap that you need to avoid.