Many people nowadays look to different ways to supplement their main source of income. One such way is to rent out their entire home or a room in their house or apartment. Modern day rental services such as Airbnb, HomeAway, or VRBO make this process accessible to the average person. Something you may not think about, however, is that you may have to report this income to the IRS to pay federal and state income taxes. Rental services such as Airbnb report the rental payments they send to their hosts to the IRS, so the IRS will know you have rental income and may expect it to appear on your tax return. However, there are some instances where you don’t have to report this income.
If you rent out all or part of your home for 14 days or less per year, then all of this rental income is tax free, regardless of how much you earn. You do not even need to report the income to the IRS. If you satisfy two conditions the rental income you receive is tax free. You don’t have to report this rental income or pay income taxes if during the year:
- you rent out your home for 14 days or less, and
- the home is used personally for more than 14 days, or more than 10% of the total days it is rented to others at a fair rental price (IRC Sec. 280A(g).)
If you are only renting out a room in your house or apartment and continue living in the rest of the space, the personal use requirement will be easily met. However, if you rent out the entire space, you need to keep track of the days you rent and the days you live there.
If you qualify for tax-free treatment then you may not deduct operating expenses for the property or take any depreciation deduction. This is because your home is not classified as a rental property. If you rent your main residence over 14 days per year and live in it for 15 days or more, you will have to report your income and pay income taxes. This can be done by filing IRS Schedule E with your tax return. Since your property is now considered a rental property, you can deduct operating expenses, within strict limits. There are different types of expenses you can deduct.
Direct Rental Expenses
You can deduct 100% of direct rental expenses. These expenses apply only to renting, such as fees to the rental agency, advertising, insurance for rental, cleaning costs, repairs, and depreciation. These expenses apply only to the rental portion of your home
You can also deduct a portion of general expenses that you need to own and operate your entire home, such as mortgage interest, real estate taxes, and insurance for the entire home. However, you can only deduct the proportion that applies to the rental portion of your home.
Before receiving any type of income, it is important to know and understand the tax implications. Although it may be tempting to never report your rental income, it is very risky. If you are using an agency such as Airbnb the IRS already knows about your rental income, and no one wants to run into problems with the IRS. Fortunately, if you are only looking to rent for a few days a year, maybe you’re going to be out of town for a bit and you want some extra cash, the IRS carves out a nice little safe haven for you. The casual renter can make a bit of extra money on the side, tax free. And everyone knows that the best kind of money is tax free money.