I just started renting out my house on Airbnb. I started a limited liability company to separate expenses from personal expenses. I’m trying to figure out what would count as a tax deduction in this scenario?
I’ve had my own marketing research LLC for about 25 years, so I know a lot — just not with renting out my house. Can one count part of the mortgage as a deduction? What about utilities and cable? I think so.
Travel & Taxes
Dear Travel & Tax,
Your question about the intersection of hospitality and rules had this line from The Eagles’ “Hotel California” running through my head: “You can check out whenever you like, but you can’t leave.” You can not leave the tax rules, ie.
There are always tax questions to answer, and your growing Airbnb business is no exception. You can deduct rental income in certain circumstances, as long as you know what to claim, how much to claim and when not to claim.
The Internal Revenue Service says rental owners can deduct mortgage interest, property taxes, operating expenses, depreciation and repairs. The cost of the “improvement” is not deductible — even if some or all of the improvement is recoverable through depreciation.
The spokesperson pointed to a link on the company’s site, which includes EY’s explanation on the topic of host tax obligations. Also count utilities (such as gas, electricity, TV and internet), cleaning services, advertising as some other deductible expenses, the document said.
“The IRS says rental owners can deduct mortgage interest, property taxes, operating expenses, depreciation and repairs. “
Airbnb’s link says it’s a good move to check with a tax professional for more specifics because there are “many special rules in this area.”
June Toth, managing member of zbt Certified Public Accounting & Consulting in Edison, NJ, is based near the mountains and the beach and, as such, frequently receives questions from clients about rental income. Your tax deductions can fall depending on your own living arrangements.
If you rent a place where you also live — a so-called “dwelling unit” — there will be limits on what rental expenses can be deducted, the IRS says. The tax agency says it will consider you using the property as a personal residence rather than a rental if you use it for 14 days or “10% of the total days you rent it out to others at a reasonable rental price.”
“If personal use does not exceed this threshold, then the property is considered a rental property” and deductions can follow, Toth said.
“If you rent a place where you also live — that is, a ‘dwelling unit’ — there will be limits on the rental expenses that can be deducted.“
Put differently: If you rent out your property for 14 days or less, you don’t have to report rental income, Toth said. But that means you can’t deduct rent-related expenses either, he adds.
Let’s say you rent this place for 15 days or more. You sound serious. You have created an LLC. You need to report rental income on Schedule E and divide your deductions between home-related personal expenses and rent-related expenses.
So how do you divide? The IRS says, “You must generally divide your total expenses between rental use and personal use based on the number of days used for each purpose.”
That means calculating eligible expenses, Toth said. Count the days when the place is actually rented, as well as the days you own it for personal use.
The rental portion of this expense can be deducted from your rental income. Mortgage interest and property taxes are the first to be used, Toth said. Operating expenses and rental depreciation are used next, he said. Any net loss will be carried over to future years, he said.
Finally, supporting records do not need to be included in the tax return, EY explained. But people should keep their records – even those who don’t have to report rental income because of the 14-day exemption – in case the taxman comes knocking.
This includes receipts for deductible expenses and repairs, a log of days when the property was rented or used personally, proof of advertising and more.
The IRS will look for records if you are selected for an audit. If you have your documents ready to prove your expenses and deductions, the sooner you will be done with the audit.
To quote The Eagles again, being done with the process counts as a “peaceful easy feeling.” I pray that for you.
Have a tax question? Write me at: [email protected]
Thanks for reading. I want to help you think more broadly about the issues that affect your taxes. I’m not offering tax advice, just an experiment to see what the rotation of tax rules and economic conditions mean for your wallet.
I’m here for readers who face their taxes with a sense of resignation. You don’t really like taxes, I understand. I used to be that guy. Beneath the jargon, think of your taxes like a maze — with money at the end. Or traps you need to avoid.