It’s called the ‘shareconomy’. It is an economy based on earning extra money by renting out items (homes, cars, power tools, etc) that would otherwise sit dormant for one reason or the other. In this particular space, Airbnb, VRBO, and Try It Tiny, are major players. But what many fail to realize is that if you do rent out your home through one of these services, you may have to pay federal and state income tax on your rental income. And as with many tax rules and IRS procedures, it can be quite complex. Most tax preparers are woefully unprepared to help with this though because the concept of a shareconomy is so new. Therefore, it is largely up to you to understand and follow the rules so you can file your taxes correctly.
NOTE: Try It Tiny is in no way a licensed tax preparer nor auditor. The following are based on research and our understanding. Please consult a professional accountant with any questions.
THE 14-DAY RULE
Did you know you can rent out all of your home or part of your home for up to 14 days per the calendar year and all of the income you receive is tax-free despite how much you earn? In fact, it is not even considered earned income. You don’t have to report it at all. you don’t even have to report the income to the IRS. In short, your rental income is tax-free if, during the year:
- you rent out your home for 14 days or less, and
- the home is used personally for more than 14 days, or more than 10% of the total days it is rented to others at a fair rental price. (SOURCE)
MAKE AN EXCEPTION
If you qualify for the 14-day tax-free treatment, you can’t deduct any operating expenses for the property or take any depreciation deduction. You simply can’t have your cake and eat it too! You don’t file Schedule E, the tax form landlords file to report their income and expenses because your home is not classified as a full rental property. Be aware and keep meticulous records of your rental nights.
THE OTHER SIDE OF THE COIN
If you rent your main house (tiny house, small house, cabin, or cottage) for more than 14 days during the year, and live in it 15 days or more, you won’t qualify for the tax-free “exemption”. At that point any money earned on the rental is considered rental income; earned income. At that point, you will have to file an IRS Schedule E form in addition to your standard tax return.But, (I told you it was confusing) you will then get to deduct your rental expenses.
RENTAL EXPENSE DEDUCTION
As a rental host, you are allowed by the IRS to deduct 100% of your direct rental expenses. These expenses can only apply to renting though; fees, commission, marketing, cleaning, repairs, etc. Keep all of your receipts and even keep a ledger of expenses. By keeping good records and recording all money spent on your rental “business”, you won’t have to go back to credit card statements, bank statements, etc. should the IRS ask for proof.
NOW YOU’RE YOUR OWN BOSS
If you are generating income from your rental, the IRS may consider you to be self-employed. As such, you have to pay self-employment taxes, as well as income taxes. Self-employment taxes cover Social Security and Medicare contributions for your income and/or salary.
This can be a difficult topic to truly understand. It may be best to talk to other successful shareconomists or Try It Tiny hosts. It is better to be safe and overprepared than sorry and audited! What do you think? Have you had to file taxes for a rental property? How as your experience?