If you rent out your vacation home or investment property, you’ll need to report the income to the IRS. For Airbnb Owners and other income-producing property owners, here’s what you’ll owe and how you can lower your tax bill.
Whether you rent your entire home or just a room, the income you earn is taxed at your normal income tax rate. For instance, this applies even if you’re just doing it to pay your mortgage or other bills.
Most people will declare this income by adding a Schedule E to their tax returns. You may need to use Schedule C if you are operating as a business by providing services beyond a basic rental and utilities. However, you don’t have to report rental income when you rent your residence out for fewer than 15 days in a year. This applies as long as you stayed in the residence yourself for at least 14 days in the same year.
Expenses related to renting out your property are deductible on Schedule E or Schedule C. You don’t need to itemize these expenses to claim them.
Expenses attributable solely to the rental are fully deductible. These include costs such as listing fees and paying a housekeeper to clean between renters.
Some expenses are related to both the rental activity and personal use. Examples include utilities, general repairs, and interest on your mortgage. These expenses can be deducted proportionally based on how much time you rented the property out. And, how much time you used it yourself.
In most cases, you can only deduct expenses up to the amount of your reported rental income. If you had $12,000 in rental income and $14,000 in rental expenses, you would only be able to deduct $12,000 in expenses to bring your net rental income down to $0.
The good news is that the deductions you weren’t allowed to take carry over. In the above example, you could use the $2,000 you weren’t able to deduct this year to reduce your rental income next year.
In some instances, you may be able to deduct the full amount of your rental-related expenses for the current year. Of course, even if doing so results in a loss. If you are a real estate professional, are involved in the active management of rental properties, or have other income the IRS considers passive, check with a tax advisor to see if you qualify for an exception.
To learn more about how the rules apply to your rental property or to get help filing your tax return, contact a tax advisor today.