Do you have a beach home, mountain getaway or other type of property that you rent out on a short-term basis? If your average rental period is less than 30 days, you will generally have two options for claiming your taxable income and deductible expenses:
Which will provide the better tax benefits and/or reduce your tax liabilities? The answer may depend on a few different factors.
If you want to deduct tax losses on your short-term rental property, Schedule C will generally be the better option. It allows you to deduct your rental losses against all other income, assuming you materially participate in the management of the rental property.
If you show positive taxable income gains on your short-term rental property, Schedule C is probably not the right choice. You will be required to pay self-employment taxes.
If you show taxable income on the transient rental, Schedule E is best. You won’t have to pay any self-employment taxes for Schedule E income as long as it is considered passive by the IRS.
The IRS has stated that rentals of living quarters are not subject to self-employment tax when there are no services rendered for the occupants. This can present some gray areas when it comes to short-term rentals like Airbnb units. What exactly are considered “services” by the IRS?
If serviced rendered meet the following two conditions, the net rental income is subject to the self-employment tax:
In general, substantial services are considered activities such as meals, entertainment, linen service and concierge services. Housekeeping while the renter is still occupying the unit is also considered a service that would constitute active income and expenses that would require a Schedule C with self-employment tax. If a guest is providing their own linens and you only clean the unit between guests, you may be considered a passive owner and can file with a Schedule E without self-employment tax.
If you have rented any part of your property out for more than 14 days in the tax year, it is considered either active or passive income by the IRS.
Running your own Airbnb can be a great source of income, especially with today’s rent prices. However, it is important to handle your income and expenses properly for tax purposes. For help with all your rental property planning needs, contact Illumination Wealth.
Special thanks to the Bradford Tax Institute for providing the source material for this article.