17 Oct 2017 Taxation of Airbnb Hosts in the Sharing Economy
In recent years, start-ups such as Airbnb, Uber, and Lyft have realized incredible success by creating an innovative sharing model for service providers. This new model, referred to on a macro scale as the “sharing economy,” has made possible what would have been unthinkable a few years ago. Indeed, it is now common practice for car owners to provide rides with their own cars and homeowners to rent rooms in their homes. They often do so through an internet platform that can introduce providers of these services to interested consumers.
The explosive growth of the new share economy, however, has left little time to think about or plan for its potential tax implications. As a result, new issues are arising and evolving under U.S. tax law about how to apply the current tax code to these new practices.
Rental income is taxable income
Generally, homeowners that are renting rooms must include earnings from all rental activities in their gross income. They may only deduct expenses related to these activities if they are considered qualified deductions.
The simplest scenario is where the host has a property that she uses only for rental activities and not for personal use at all. In this case, there are no limitations for deductions related to her rental activities.
It is not necessary, however, that the “entire home” be dedicated to the rental activities. Instead, it can be a portion of the taxpayer property such as a basement apartment with its own kitchen and restrooms; or an extension of the property with its own facilities located in the garden. Basically, it has to be a unit separate from the personal part of the residential property.
Most hosts in the new sharing economy, however, are renting rooms in areas of the home that they also personally use. In this situation, it can be tricky to figure out which rental activity expenses are deductible in computing their net taxable income.
Airbnb hosts may deduct rental-related expenses
There are two situations where a host may be able to deduct rental-related expenses: (1) where the property falls under “the hotel exception,” and (2) where the property does not rise to the level of “residence.”
The hotel exception means that the portion of the property that is used for the rental activity will be considered a hotel, motel, inn, or similar establishment. This exception implies that the portion of the property used for home sharing activity has to be regularly available for occupancy by paying customers and cannot be used for personal use when it is vacant. For example, a home sharing host that rents a room in her house for short-term occupancy to paying guests and who does not personally use the room the rest of the time may qualify for this exception. In such a case, the home sharing host would be able to deduct expenses related to the rental use portion of the property as long as she keeps separate the expenses related to the personal use portion of the property.
If a home sharing host uses her property for rental use and for personal use but the personal use does not rise to the level of a “residence,” only some restrictions for deductions will apply. The term residence refers to a property that is used for more than 14 days or 10% of the number of days for which the property is rented at fair rental. If the property is used for less than this amount of days, the property is not a residence. In the latter case, expenses must be allocated between rental use days and personal use days.
For example, a property that is personally used only 20 days per year and is used for rental activities the rest of the year (345 days) is not a residence. Thus, if the rental use expenses amount to $5,000 per year, the homeowner can deduct expenses up to $4,710.15. If, however the property is considered as residence because the home owner uses it for personal use for than 14 days or 10% of the number of days for which the property is rented, the deductions attributable to the rental activity are much more limited.
In this particular case, the deduction for expenses (other than interest, taxes, and casualty losses) are limited to gross rental income after deducting expenses allocable to the rental use but not to the rental property itself. To illustrate, assume a host rents a room in her house for 28 days per year and uses it for personal use 345 days per year. She earns $5,000 of rental income and incurs $2,000 of property tax and $400 in expenses related to the rental activity. The taxpayer is limited to a deduction of $4,446.58 for the expenses attributable to the rental activity but not otherwise deductible (e.g., insurance). If the gross income received from the sharing activity is less than the deductions allocable to the rental use, then the taxpayer cannot take any deduction.
These rules were enacted many years ago when the sharing economy did not exist and can be confusing when applied to modern fact patterns. They were designed for traditional small business owners and traditional landlords. For now, there exists no revised framework for taxation related to the sharing economy, which is why best practice is to consult a certified public accountant when filling tax returns.
Tip: State and local restrictions on sharing hosts
In San Francisco, a home sharing host who receives guests for periods of less than 30 nights (short term rentals) needs to meet several requirements. The home sharing host needs to be a permanent resident of the unit where she hosts guests. To be a permanent resident the host needs to spend at least 275 nights a year in the unit. Also, the host must obtain a Business Registration Certificate from the San Francisco Office of the Treasurer & Tax Collector. In addition, the host must register with the Office of Short-Term Rentals and the certificate number must be posted on all listings advertising the short-term rental. A host may only conduct “unhosted” short-term rentals for up to 90 nights per calendar year. This means that the rest of the time, the host needs to be present in the property during the guests’ stay.Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.