Short-Term Rentals: The Tax Implications of the Sharing Economy

From Uber to Airbnb, the sharing economy is upon us. Across the country, hundreds of thousands of Americans are using personal resources to provide assistance for others, demonstrating remarkable trends in the customer service industry.

The allure of making side income as a short-term landlord is certainly compelling, but any income source comes with added complications. Before renting out your room, it’s important to understand what to expect when April 15th rolls around.

Do Local or Sales Taxes Apply to Short-Term Rentals?

The answer to this question depends largely on residence. In most areas, short term rentals of less than 30 days are indeed subject to state and local taxes, but this will vary from one location to another. Prior to listing your property, be sure to research hotel occupancy taxes in your locality to verify whether one or both of these types of tax are applicable.

How Do I Report Earnings on My Tax Return?

Taxable earnings can be reported in one of two ways depending on the extent of involvement in the process of renting your property.

In general, income and expenses related to rentals should be reported on Schedule E, Supplemental Income and Loss, Part I, of Form 1040. This applies to any rental of property in which the property owner covers basic costs like electricity, gas, water, and trash collection. However, if maintaining rental property requires substantial effort as a part of a business, like acting as a real estate agent or landlord, income and expenses should be reported on Schedule C, Profit or Loss From Business.

Do I Have to Separate Personal and Rental Costs?

If you reside on your property at any point, all deductible costs must be divided accordingly. If you rent out your entire home, a simple division by day will suffice; for example, if you rented out your home for one month out of the year, expenses can be multiplied by 30/365 to determine a reasonable split. Deductible rental expenses can be reported on Schedule E or C, while any applicable personal expenses should be added to Schedule A.

What If I Only Rent Out Part of My Home?

If you only rent out part of your home, the formula to allocate expenses gets a little more complicated.

First, applicable costs must be divided between personal living space and rented living space using a logical and reasoned method, such as square feet or total number of rooms in the home. For example, if you rent a 200 square foot room in a 2,000 square foot home, you can allocate 10% to rental expenses. Alternately, if you have a 4 room home and rent one of the rooms, 25% of your costs may be reasonably allocated to the portion you rent. If a portion of the home was only rented for part of the year, a daily breakdown must then be applied to determine the true extent of allocable rental costs.

Qualified Tax Help

If you are considering listing your second home, primary home, or a portion of your home through a service like Airbnb, Klein Hall is here to help. With expertise in handling the needs of individuals participating in a sharing economy, we’re happy to provide assistance with taxes, bookkeeping, and more. Contact our team today!