This past year many have expanded the ways in which they earn income. Some have taken up side-gigs like driving for Uber or Lyft, selling crafts online, or renting out a room in their house on vacation rental sites like AirBnB. If you are renting out a house on AirBnB, you may be wondering how does AirBnB and vacation rental income affect you or your taxes?
Let’s talk about a question submitted from a client, let’s call her Jasmine. Jasmine owns her main home, but began renting her back house through AirBnB. She is earning income from her vacation rental. She is confused about the tax treatment of renting through AirBnB and whether she is considered a side-gigger now. Jasmine is wondering should she report renting her home through AirBnB and her vacation rental income?
Jasmine’s reporting of her backhouse rental through AirBnB will depend on a couple criteria.
It is possible that Jasmine will receive a Form 1099-K or an earnings summary report of the gross amount received for the rental from AirBnB. Rental income from AirBnB is reportable on Form 1040 unless the rental activity is deemed non-taxable.
How to know if the income non-taxable?
For Jasmine’s rental activity to be deemed non-taxable, no matter how much she earned, Jasmine must satisfy both the following:
- She must reside-in/personally use her house during the tax year for more than 14 days or more than 10% of the total days it is rented AND
- Rent the property for 14 combined days or less during the tax year
Keep in mind if the above exclusion applies to her, she will not be able to deduct any of the expenses associated with the rental.
What is considered substantial services?
If the property was rented for more than 14 combined days during the tax year, classification of the rental income would depend on if she provided “substantial services” to the guests.
The IRS defines “substantial services” as those that are primarily for the tenant’s convenience. Namely “regular cleaning, changing linen, or maid service”. These services are similar to what you might receive at a hotel and could include services such as providing meals, tours, and transportation. Please note substantial services do not include utilities, internet and Wi-Fi, repairs, and maintenance.
If substantial services are provided, a short-term rental can be classified as business activity and subject to self-employment tax.
On the other hand, if substantial services are not provided, the short-term rental income would be reported as passive income.
Don’t worry about knowing all the tax rules and implications. If you have a question like this, submit it in our comments so we can cover the topic. Contact the team at Bright Tax to help you navigate through your tax preparation and planning. Our team of licensed tax professionals are ready to help with your specific tax needs.