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Airbnb - Tax Planning Considerations and Other Issues of Relevance

Inside of a beautiful living space. Airbnb tax planning considerations.

7/28/2016

Like many businesses that came about purely due to the exponential growth of the internet, Airbnb has developed into a gigantic enterprise, facilitating commerce on an individual to individual basis. Its growth has been exponential with its market spanning over 190 countries, with more than one million listings. As these new models of conducting commerce evolve, they bring with them new issues related to contractual, regulatory, statutory, and taxation matters. 

Airbnb facilitates the renting out of your home for compensation but the tax rules can become complex. It is important for you to understand some of the tax issues that may impact you.

The 15 Day Rule

If a home or a rental is rented out for a period of less than 15 days per year, then all the income derived from this rental is tax free, and does not have to be reported. As such, no expenses are deductible. 

A personal residence that is rented out to others, may limit the amount of general expenses that are deductible, if the residence is used for personal purposes for more than the greater of 14 days, or 10% of the total days you rent it to others at a fair rental price. In this instance, you would need to allocate the expenses between the rental use and the personal use based on the number of days used for each purpose. Rental expenses would be deductible only to the extent of the rental income. However, you may be able to carry forward the excess to the following year, subject to the same limitation i.e. the rental income in the following year. Expenses that are directly related to the rental such as fees, commissions, advertising, rental insurance and depreciation allocable to the rental portion of the home, could be deducted in full. 

Rentals Treated as Business

In certain instances, the rental of your property could be treated as a business operated as a hotel or a bed and breakfast. Usually, when rooms are rented out with personal services provided (such as cleaning, changing linen etc.) and never used for personal purposes, it is very likely that the rental will be treated as a trade or business. As per recent regulations, such rental will be subject to personal property taxes. Furthermore, losses from the rental may be subject to the passive loss rules, where losses may be disallowed, and carried over to future years. However, if the rental qualifies as a trade or business, then depreciation would be allowed on the building. 

In most areas short term rentals (30 days or fewer) may also be subject to the hotel tax. Cities such as Los Angeles and New York, which are popular destinations, are imposing the tax. Note that this tax is in addition to the personal property, and the income tax. In certain states, Airbnb collects and remits the hotel tax on behalf of its hosts. In San Francisco and Chicago, Airbnb collects the tax up front from the hosts. Often times, certain cities and jurisdictions require hosts to register with their city or county before collecting and submitting the tax. It is therefore advisable to determine the applicability of the hotel or occupancy tax in your area prior to renting out the property. Not registering and paying the tax may subject you to onerous penalties. 

Should you have any questions related to the above, please call your RINA advisor for further information. 

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