Owning an Airbnb or VRBO is a great way to bring in extra money, especially since they can bring in more than a traditional rental. However, there is one part of running an Airbnb people don’t understand. Airbnb taxes. Did you know that there are different tax rules for running short term rentals like an Airbnb & VRBO vs. a traditional rental? We’re going to teach you the differences so you don’t get taxed by your taxes.
Do I have to report my Airbnb to the IRS? (14-Day Exemption)
Before we get into the details of how much your taxes might be, let’s see if you even need to tell the IRS.
If you rent out your Airbnb (or any rental) for under 14-days, you don’t have to report the income to the IRS. This is an exemption sometimes referred to as “The Augusta Rule”.
History of the rule is back in the 70’s in Augusta, Georgia there was an annual PGA Masters Golf tournament that drew in lots of people. A lot of homeowners were renting out their homes during the tournament and didn’t want to pay taxes. So PGA Golf lobbyists stepped up and convinced Congress to pass this law.
For you to be eligible for the 14-Day Exemption, but you must meet certain conditions:
- The property must be a personal residence or your vacation home. A personal residence is a home you use more than 14 days or more than 10% of the days you rented it out, whichever is greater
- You cannot rent the property out for more than 14 days. Even if you rent it out 1 day longer (15 days), you will have to report all your income (not just the extra day)
- The rental days do not have to be a consecutive (back-to-back)
A lot of people use the 14-day exemption when big events, like the Olympics, come to their town. However, if you want to run your Airbnb all year, you’re going to have to report it to the IRS.
How should I report my Airbnb on my taxes?
Airbnb Schedule C or Schedule E
The most common question I get regarding Airbnb Taxes is, “how do I report it on my tax return?”
There are two (2) different ways people report their Airbnb rental. On either a Schedule C or Schedule E. Depending on which one you have to use, you will pay the IRS more money. Here are the key differences between the two:
Airbnb Schedule C (Trade or Business) – extra 15.3% tax
Trade or Businesses are reported on a Schedule C. Some examples are side-hustles like part-time freelancer, or rideshare driver (Uber / Lyft). The taxes are much worse for a Schedule C because you have to pay income tax and self-employment tax (15.3%).
Schedule C Example: Let’s say you make $20,000 net profit from your Airbnb in 2021. If you’re in a 20% income tax bracket, you will have to pay a total of $7,060 in tax. (20% income tax + 15.3% self-employment tax = 35.3% total tax rate times $20K). That’s a lot of tax for a rental, so you want to avoid a Schedule C if possible.
Airbnb Schedule E (Passive Rental Activity)
Schedule E is how almost all rental income is reported. The advantage to reporting your income as a Schedule E is that there is no self-employment tax. However, it may be subject to an extra tax called the Net Investment Income Tax (NIIT) of 3.8%.
Schedule E Example: using the same amounts as above, your tax on $20,000 would now be $4,760 (20% income tax + 3.8% NIIT = 23.8% total tax rate times $20K). That’s a tax savings of $2,300!
If your Airbnb has a profit, you want it on Schedule E, not Schedule C. That way you don’t have to pay an extra 15.3% of self-employment tax. But how do you do that?
When can I use Schedule E and not Schedule C?
If you can prove that your Airbnb is a “Rental Activity” then you can report it on your Schedule E. Most rentals are considered Rental Activities, but there are a few tests that the IRS created to see if you’re a Trade or Business (Schedule C).
The two most important tests are the 7-Day Test and Significant Personal Service Test. If you meet either of these tests, it’s a Trade or Business and you must report it on a Schedule C as a trade or business.
If your average rental period for your tenants is 7-days or less, it’s a trade or business. You calculate your average rental period by dividing your total number of nights available for rent by number of booked reservations.
Here’s an example: in 2021 you have 62 Airbnb reservations and 211 total nights in which the Airbnb was offered for rent. Your average rental period is 3.40 nights per tenant (211 divided by 62). This means your Airbnb is a trade or business and must be reported on your Schedule C.
Significant Personal Services Test
If your average rental period is 30-days or less and you offer significant personal services to your customers, it’s considered a trade or business. Your Airbnb may be able to get over the 7-day test, but it’s not likely it can get over a 30-day rental period.
So if this is your situation, you’ll have to make sure that you aren’t offering any services than may be considered significant. Here is chart to show you what’s considered regular services vs. substantial ones:
|Regular Services||Substantial Personal Services|
|Pay for utilities||Clean property while it’s occupied|
|Offer internet and Wi-Fi||Offer Concierge services|
|Clean the common area||Offer Guest Tours and Airbnb Experiences|
|Make normal repairs and maintenance||Pay for their meals (e.g. offer breakfast)|
|Offer trash collection||Offer them transportation|
|Pay HOA fees||Offer customary hotel-like services|
Airbnb Tax Strategies so it’s not a Trade or Business?
Here are two Airbnb tax strategies you can use so your Airbnb is a Rental Activity and not a Trade or Business:
Make sure you only allow rentals for 7 or more days
I have clients that want to avoid the extra 15.3% self-employment tax at all costs, so they only allow people to book their Airbnb for a minimum of 7-day or more. This helps them get past the 7-Day Test.
Do not off significant or substantial services
Do not offer breakfast or lunch, do not clean the unit while tenant is still staying there, do not offer to help them with transportation (like airport pick-up / drop-off), and do not offer Airbnb Activities or Airbnb Experiences (such as Picnics, City Tours, Pub Crawls, etc.). By offering these extras you will move your Airbnb from a Rental Activity to a Trade or Business.
What if my Airbnb is losing money?
If your rental is losing money you want it on your Schedule C and not Schedule E (opposite of when you are profitable).
If your Airbnb is a passive activity, and you make too much money your rental losses may be suspended. Which means you can’t take the loss now, you have to carry it forward into the next year. These are called the “Passive Activity Rules” (PALs – which we will be covering in more detail in a future article).
However, if your Airbnb is a trade or business running at a loss, there are no passive activity rules that suspend your loss. So you can offset that loss against against other ordinary income such as W-2 income or other 1099-NEC income. Here is an example of the two methods side-by-side:
|Income Amounts & Tax Rate|| Trade or Business |
|Rental Activity |
|Paycheck / Wages / W-2 income||$175,000||$175,000|
|Amount Suspended due to PALs||<$0>||<$15,000>|
|Income Tax Rate (20%)||20%||20%|
|Total Tax due to the IRS||$32,000||$35,000|
In this example your Airbnb was losing money. By reporting it on your Schedule C you saved $3,000 in tax. You’re probably asking yourself, “why would I ever want to lose money?” You don’t, but if you are depreciating the home, the Airbnb can cashflow profit, and you may have a loss for tax purposes.
Please keep in mind, you cannot flip the type of activity your rental is year-to-year based on whether or not it makes a taxable profit or not. That’s a giant red flag to the IRS.
What’s depreciation anyways?
Depreciation is when you write off the value of an asset over time. Normally if you buy an asset, the value goes down over many years. Common examples are cars, cell phones, and computers. Even though that’s not usually the case in real estate, the government allows you to write off a portion of the home as depreciation. We will be covering the details of real estate depreciation in a future article, for now remember that depreciation of real estate is your friend and that’s why so many of the rich make a fortune in real estate.
Conclusion / Airbnb Tax Deductions
We’ve covered a lot. Now that you understand the basic tax rules for an Airbnb, we are going on to the next step which is what deductions can you take. In our next article we are going to go over all the deductions and include a few examples to show you how to report your Airbnb correctly on your tax return.