“ When it comes to self-help legal stuff, nobody does a better job than Nolo.” USA TODAY Tax Guide for Short-Term Rentals Airbnb, HomeAway, VRBO and More Stephen Fishman J.D Free Legal Updates at Nolo.com This Book Comes With Lots of FREE Online Resources Nolo’s award-winning website has a page dedicated just to this book Here you can: KEEP UP TO DATE When there are important changes to the information in this book, we’ll post updates And that’s not all Nolo.com contains thousands of articles on everyday legal and business issues, plus GET DISCOUNTS ON NOLO PRODUCTS Get a plain-English law discounts on hundreds of books, forms, and dictionary, all written by software Nolo experts and available READ BLOGS Get the latest info from Nolo for free You’ll also find authors’ blogs more useful books, LISTEN TO PODCASTS Listen to authors discuss timely issues on topics that interest you WATCH VIDEOS Get a quick introduction to a software, online apps, downloadable forms, plus a lawyer directory legal topic with our short videos Get updates and more at LAW for ALL www.nolo.com/back-of-book/ARBNB.html The Trusted Name (but don’t take our word for it) “ In Nolo you can trust.” THE NEW YORK TIMES “ Nolo is always there in a jam as the nation’s premier publisher of do-it-yourself legal books.” NEWSWEEK “ Nolo publications…guide people simply through the how, when, where and why of the law.” THE WASHINGTON POST “ [Nolo’s]…material is developed by experienced attorneys who have a knack for making complicated material accessible.” LIBRARY JOURNAL “ When it comes to self-help legal stuff, nobody does a better job than Nolo…” USA TODAY “ The most prominent U.S publisher of self-help legal aids.” TIME MAGAZINE “ Nolo is a pioneer in both consumer and business self-help books and software.” LOS ANGELES TIMES Tax Guide for Short-Term Rentals Airbnb, HomeAway, VRBO & More Stephen Fishman, J.D LAW for ALL FIRST EDITION JANUARY 2018 Editor DIANA FITZPATRICK Book Production SUSAN PUTNEY Proofreading ROBERT WELLS Index MEDEA MINNICH Printing BANG PRINTING Names: Fishman, Stephen, author Title: Tax guide for short-term rentals : Airbnb, HomeAway, VRBO & more / Stephen Fishman, J.D Description: 1st edition | Berkeley, CA : Nolo, 2017 | Includes index Identifiers: LCCN 2017026767 (print) | LCCN 2017027560 (ebook) | ISBN 9781413324570 (ebook) | ISBN 9781413324563 (pbk.) Subjects: LCSH: Bed and breakfast accommodations Taxation Law and legislation United States | Vacation rentals Taxation Law and legislation United States | Rental housing Taxation Law and legislation United States | Income tax deductions United States Classification: LCC KF6495.H67 (ebook) | LCC KF6495.H67 F57 2017 (print) | DDC 343.7306/6 dc23 LC record available at https://lccn.loc.gov/2017026767 This book covers only United States law, unless it specifically states otherwise Copyright © 2017 by Nolo All rights reserved The NOLO trademark is registered in the U.S. Patent and Trademark Office Printed in the U.S.A No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission Reproduction prohibitions not apply to the forms contained in this product when reproduced for personal use For information on bulk purchases or corporate premium sales, please contact the Special Sales Department Nolo, 950 Parker Street, Berkeley, California 94710 Please note We believe accurate, plain-English legal information should help you solve many of your own legal problems But this text is not a substitute for personalized advice from a knowledgeable lawyer If you want the help of a trained professional—and we’ll always point out situations in which we think that’s a good idea—consult an attorney licensed to practice in your state Acknowledgments Many thanks to: Diana Fitzpatrick for her outstanding editing Susan Putney for book design Robert Wells for proofreading Medea Minnich for the index About the Author Stephen Fishman has dedicated his career as an attorney and author to writing useful, authoritative, and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers He is the author of over 20 books and hundreds of articles, and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications Among his books are Every Landlord’s Tax Deduction Guide; Deduct It! Lower Your Small Business Taxes; Working with Independent Contractors; and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants All are published by Nolo His website is at www.fishmanlawandtaxfiles.com Table of Contents Introduction: Who This Book Is For How Short-Term Rental Hosts Are Taxed Income Taxes Social Security and Medicare Taxes 12 Net Investment Income Tax .16 Local and State Occupancy Taxes 18 Tax-Free Short-Term Rentals 21 Short-Term Rentals That Qualify for Tax-Free Treatment 22 Effect of Qualifying for Tax-Free Treatment .26 Deducting Your Expenses: The Basics 29 What You Can Deduct 30 How Your Tax Status Affects Your Deductions .32 Deductions for Multiple Owners 37 Operating Expenses 41 What Are Operating Expenses? 42 Direct Expenses Deductible in Full .43 Operating Expenses That Must Be Allocated 54 Repairs 61 Repairs vs Improvements 62 Deducting Repairs for Short-Term Room Rentals 63 Three Safe Harbors 65 Repair Versus Improvement: Analysis Under the Regulations .71 How to Deduct Repairs and Maintenance .74 When Guests Pay for Repairs 74 Properly Document Repairs 75 Deducting Long-Term Assets 77 Depreciating Property Used in Your Rental Activity 79 How to Depreciate Real Property 80 Personal Property 87 Section 179 Expensing 93 Regular and Bonus Depreciation 95 Personal Property Converted to Rental Use 97 Prorating Your Deductions 99 Direct Expenses Are Fully Deductible 100 Expenses That Must Be Prorated 101 Calculating Personal and Rental Days 104 Reporting Rental Income on Your Tax Return .109 Most Hosts Use Schedule E to Report Rental Income 110 Schedule E Line-by-Line 111 Completing Schedule E When You Have a Rental Loss 119 Hosts Who Don’t File Schedule E 125 10 Filing IRS Form 1099 Information Returns 131 When Someone Else Reports Your Rental Income to the IRS 132 Reporting Payments You Make to ICs and Other Workers 134 Back-Up Withholding for Independent Contractors 138 11 Deducting Losses for Short-Term Rentals 139 What Are Rental Losses? 140 Which Rental Loss Rules Apply 141 Vacation Home Rules 142 Hotel Business Rules 149 Regular Rental Activity Rules 153 12 Record Keeping 157 What Records Do You Need? 158 Tracking Income and Expenses 160 Supporting Documents for Your Expenses 163 Property Usage Record 172 Index 173 CHAPTER 12 | RECORD KEEPING | 165 ordinarily depreciated over several years, not deducted in a single year like operating expenses Depreciation is covered in detail in Chapter When you purchase any property with a useful life of more than one year, you must keep records to verify: • when and how you acquired the asset • the purchase price • how you used the asset • the cost of any improvements—for example, adding a new roof to a rental building • Section 179 deductions taken (see Chapter 7) • deductions taken for depreciation • when and how you disposed of the asset • the selling price, and • expenses of the sale You should create a depreciation worksheet showing this information for all your long-term assets, and update it each year The instructions to IRS Form 4562, Depreciation and Amortization (Including Information on Listed Property), contain a blank worksheet You can also use a spreadsheet or computer accounting program such as QuickBooks You don’t need to file the worksheet with your tax returns, but it will provide you with all the information you need to claim your depreciation deductions on your taxes And you will need it if you are audited Listed Property The IRS is especially interested in certain kinds of property that taxpayers can easily use personally—but claim that they purchased for their business To minimize the chances of abuse, the IRS separates these properties into a list—which is called listed property Listed property gets extra scrutiny and has special documentation requirements Listed property includes: • cars, boats, airplanes, motorcycles, and other vehicles • computers, and • any other property generally used for entertainment, recreation, or amusement—for example, cameras and camcorders 166 | TAX GUIDE FOR SHORT-TERM RENTALS: AIRBNB, HOMEAWAY, VRBO & MORE Keep an appointment book, logbook, rental diary, or calendar showing the dates, times, and reasons for which the property is used— both for rental and personal purchases You usually have to document your use of listed property even if you use it only for your rental activity However, there is an exception to this rule for computers: If you use a computer or computer peripheral (such as a printer) only for your rental activity and keep it at your office, you need not comply with the record-keeping requirement This includes computers that you keep at your home office if the office qualifies for the home office deduction This exception applies only to computers and computer peripheral equipment Asset Files You should establish an asset file where you keep all your records supporting your depreciation deductions This doesn’t have to be anything fancy An accordion file will work fine Keep your real property closing statements and any documentation showing the cost of the land, such as appraisals and property tax statements File your receipts for each long-term asset you purchase, as well as canceled checks or credit card statements proving how much you paid It’s particularly important to keep receipts for real property improvements, because these will affect the tax basis of your real property (See Chapter 7.) You need not file any of these supporting documents with your tax returns, but you must have them available in case the IRS audits you and questions your depreciation deductions Records Required for Local Travel If you use a car or other vehicle for your rental activity, you can be entitled to take a deduction for gas and other auto expenses You can either deduct the actual cost of your gas and other expenses, or take the standard rate deduction based on the number of rental miles you drive Either way, you must keep a record of: CHAPTER 12 | RECORD KEEPING | 167 • your mileage • the dates of your rental business trips • the places you drove to for rental business, and • the rental business purpose for your trips The last three items are relatively easy to keep track of You can record the information in your appointment book, calendar, or day planner Or, you can record it in a mileage log Calculating your mileage takes more work The IRS wants to know the total number of miles you drove during the year for your rental business, your commuting miles, and your personal driving other than commuting To keep track of your rental activity driving, you can use either a paper mileage logbook that you keep in your car or an electronic application There are dozens of apps that you can use to record your mileage with an iPhone or similar device Tracking Rental Mileage Record your mileage when you use your car for your rental activity If you record your mileage with an electronic app, check the manual to see how to implement this system If you use a paper mileage logbook, here’s what to do: • obtain a mileage logbook and keep it in your car with a pen attached • note your odometer reading in the logbook at the beginning and end of every year that you use the car for rental purposes (If you don’t know your January odometer reading for this year, you might be able to estimate it by looking at auto repair receipts that note your mileage.) • record your mileage and note the rental purpose for the trip every time you use your car for rental purposes, and • add up your rental activity mileage when you get to the end of each page in the logbook (this way, you’ll only have to add the page totals at the end of the year instead of all the individual entries) 168 | TAX GUIDE FOR SHORT-TERM RENTALS: AIRBNB, HOMEAWAY, VRBO & MORE At the end of the year, your logbook will show the total rental activity miles you drove during the year Calculate the total miles you drove during the year by subtracting your January odometer reading from your December 31 reading If you use the actual expense method, you must also calculate the percentage of your driving for rental use Do this by dividing your rental miles by your total miles Sampling Method If you drive about the same amount for rental purposes throughout the year you can use the sampling method to track your method However, if you only rent your property certain times of the year—for example, during the summer—you can’t use this method With the sampling method you keep track of your rental mileage for a sample portion of the year and use your figures for that period to extrapolate your rental mileage for the whole year Your sample period must be at least 90 days—for example, the first three months of the year Alternatively, you may sample one week each month—for example, the first week of every month You don’t have to use the first three months of the year or the first week of every month; you could use any other three month period or the second, third, or fourth week of every month Use whatever works best for you—you want your sample period to be as representative as possible of the rental travel you throughout the year You must keep track of the total miles you drove during the year by taking odometer readings on January and December 31 and deduct any atypical mileage before applying your sample results Keeping Track of Actual Expenses If you take the deduction for your actual auto expenses instead of using the standard rate (or if you are thinking about switching to this method), keep receipts for all of your auto-related expenses, including gasoline, oil, tires, repairs, and insurance CHAPTER 12 | RECORD KEEPING | 169 Allocating Your Rental Miles You are required to list on Schedule E your car expenses for each rental property you own This is no problem if you only own one home you rent to short-term guests But things can get more complicated if you own more than one, because you may make some trips that benefit more than one property at the same time—for example, a trip to the hardware store to purchase supplies you’ll use for all your properties In this event, you must allocate your mileage among your properties You can split your mileage equally or use a percentage based on the income your properties earn Records for Long-Distance Travel, Meals, Entertainment, and Gifts Deductions for travel, meals, entertainment, and gifts are hot button items for the IRS because they have been greatly abused by many taxpayers You need to have more records for these expenses than for almost any others, and they will be closely scrutinized if you’re audited Whenever you incur an expense for rental-related travel, meals, gifts, or entertainment, you must document the following facts: • The date The date you incurred the expense will usually be listed on a receipt or credit card slip; appointment books, day planners, and similar documents have the dates preprinted on each page, so entries on the appropriate page automatically date the expense • The amount You’ll need to be able to prove how much you spent, including tax and tip for meals • The place Where you incurred the expense will usually be shown on a receipt, or you can record it in an appointment book • The rental activity purpose You’ll have to be able to show that the expense was incurred for your rental activity—for example, that you took an out-of-town trip to inspect or repair your property 170 | TAX GUIDE FOR SHORT-TERM RENTALS: AIRBNB, HOMEAWAY, VRBO & MORE The chart below shows the information your records must contain for travel, meal and entertainment, and gift expenses Receipts to Keep Type of Expense Receipts to Save Travel Airplane, train, or bus ticket stubs; travel agency receipts; rental car; and so on Meals Meal check; credit card slip Lodging Statement or bill from hotel or other lodging provider; your own written records for cleaning, laundry, telephone charges, tips, and other charges not shown separately on hotel statement The IRS does not require you to keep receipts, canceled checks, credit card slips, or any other supporting documents for travel, meal and entertainment, and gift expenses that cost less than $75 However, you must still document the four facts listed above This exception does not apply to lodging—that is, hotel or similar costs—when you travel for your rental activity You need receipts for these expenses, even if they cost less than $75 All this record keeping is not as hard as it sounds You can record the four facts you have to document in a variety of ways, and the information doesn’t have to be all in one place Information that is shown on a receipt, canceled check, or other item need not be duplicated in a log, appointment book, calendar, or account book Thus, for example, you can record the four facts with: • a receipt, credit card slip, or similar document alone • a receipt combined with an appointment book entry, or • an appointment book entry alone (for expenses less than $75) However you document your expense, you are supposed to it in a timely manner You don’t need to record the details of every expense on the day you incur it It is sufficient to record them on a weekly basis However, if you’re prone to forget details, it’s best to get everything you need in writing within a day or two CHAPTER 12 | RECORD KEEPING | 171 Proof Required for Travel, Entertainment, and Gift Deductions Type of Expense Records must show Travel Amount Cost of each separate expense for travel, lodging, meals Incidental expenses may be totaled in categories such as taxis, daily meals, and so on Time Dates you left and returned for each trip, and the number of days spent on business Place or Description Name of city, town, or other destination Business Purpose and Relationship Business purpose for the expense, or the benefit gained or expected to be gained Entertainment Amount Cost of each separate expense (including meals) Time Date of entertainment Incidental expenses (such as taxis, telephones) may be totaled on a daily basis Place or Description Name and address or location of place of entertainment Type of entertainment, if not otherwise apparent For entertainment directly before or after business discussion: date, place, nature, and duration Business Purpose and Relationship Nature of business discussion or activity Identities of people who took part in discussion and entertainment Occupations or other information (such as names or titles) about the recipients that shows their business relationship to you Proof you or your employee were present at business meal Gifts Amount Cost of gift Time Date of gift Place or Description Description of gift Business Purpose and Relationship Same as for entertainment 172 | TAX GUIDE FOR SHORT-TERM RENTALS: AIRBNB, HOMEAWAY, VRBO & MORE Property Usage Record Finally, you need to have a record of how your home was used throughout the year—that is, how many days: • it was used personally by you or others • rented to short-term guests, and • not in use because it was vacant or undergoing repairs or maintenance The rules for determining what constitutes each type of use are covered in detail in Chapter You should keep track of each type of use with a calendar or spreadsheet Also, keep track of how many short-term guests you rent to during the year A good way to prove to the IRS how long your guests—paying and otherwise—stayed in your vacation home is to have them all sign and date a visitors’ book You can create one yourself or buy one from a stationery store l Index A B Accountant fees, 51 Accounting software, 160 Actual expense method, 46, 168 Adaptations, 73 Additions, 85 Adjusted basis, 81–82 Adjusted gross income (AGI) threshold, 16–17 Advertising expenses, 44 Affordable Care Act, 16 Airbnb damage reimbursement, 57 Form 1099-K reporting, 133 host service fees, 44 income potential, listing fees, occupancy tax resources, 19–20 Air-conditioning improvements, 85 Allocation for personal use See Prorating deductions Amenities, 52 Appliance expenses, 31, 79 Asset records, 164–165, 166 At-risk rules, 118 Automobile expenses, 45–46, 114 Avalara, 19, 20 Backup withholding, 9, 138 Bank account for rental, 159, 164 Basement conversions, 73 Bed and breakfast exclusions, 13, 18 Bed tax, 18–20 Betterments, 72 Bolton method, 108, 147–149 Bonus depreciation, 95–96 Bookkeeping software, 160 Business activity rules, 33–36 Business-entity owners, 38–39, 126–127 Business importance test, 50 C Cancellation fees, Capital expenses, 31 See also Long-term assets Capital gains, 11–12, 17 Car expenses, 45–46, 114 Carrying forward losses, 145 Casualty losses, 57–59 Checking account for rental, 159, 164 Cleaning fees, 53, 115 Commercial property depreciation, 82–83 Commissions, 44, 115 Common area expenses, 88 Community property states, 126 Contractor services, 112, 134–138 Conversions, 12, 97–98 Co-owners business-entities, 38–39, 126–127 deductions overview, 37–39 multiple hosts, 25–26 not married, 37 spouse, 38, 125–126 tax reporting, 110, 111–112, 125 travel expense deductions, 48 Credit card for rental, 160, 164 Credit card interest, 55 Credit report fees, 53 Current expenses, 42–43 See also Operating expenses D Damage to property, 57–59 Deducting expenses See Expense deductions Deduction allocation See Prorating deductions De minimis safe harbor, 70–71, 89–91 174 | TAX GUIDE FOR SHORT-TERM RENTALS: AIRBNB, HOMEAWAY, VRBO & MORE Depreciation calculating, 84 improvements, 85–86 as mandatory, 78 overview of, 31, 78 personal property, 79–80, 87–89 personal property conversions, 97–98 prorating, 9, 86 recapture, recovery periods, 82–83 regular and bonus, 95–96 in rental loss reporting, 123 reporting, 117 selling your property, 87 tax basis determinations, 80–82 Destruction of property, 57–59 Direct expenses, 100–101, 144 Disregarded entities, 38 Documentation See Record keeping Driveway expenses, 79, 86 Dry cleaning expenses, 48 Dues deductions, 53 Duration of rental, See also 14-day rule Dwelling unit, 22, 82–83, 142 E Education expenses, 53 Electronic payments, 132–133, 135 Employee taxes, 10, 15–16 Entertainment expenses, 52, 169–171 Estimated taxes, 9–10, 15 Exclusion, service business, 13–14, 125 Exclusive use test, 50 Exempt rentals See tax-free rental exclusion (14-day rule) Expense deductions, 30–39 depreciation proration, direct expenses, 100–101 multiple owner deductions, 37–39 overview of, 7, 9, 30–32 personal tax status impact, 32–36 reporting, 117–118 tax-free rental exclusion, 27 See also Long-term assets; operating expenses; record keeping; repairs Expenses paid by guests, F Fair market value, 81 Fair rental price, 105–106 Fees, guest, 8, 27, 44 Fees, local, 44 Fees, rental platform, 27, 44 Fees, third-party payment, 53 Fence expenses, 79, 86 FIRE Production System, 136 Fixture installation expenses, 86 Form 1099 K, Payment Card and Third Party Network Transactions, 28, 132–133 Form 1099-MISC (payments to hired workers), 112, 134–138 Form 4419, Application for Filing Information Returns Magnetically/ Electronically, 136 Form filing services, 136 Form W-9, Request for Taxpayer Identification Number and Certification, 9, 138 14-day rule, 6, 23–24, 59 Full-time room rentals, 143 Furniture expenses, 31, 79 G Garage conversions, 73 Garage fees, Gift expenses, 52, 169–171 Gross receipts tax, 18–20 Gross rental income limitation, 144 Guest amenities, 52 Guest cottage conversion, 12 Guest fees, 8, 27, 44 Guest rental rates, 20, 105–106 Guests paying for repairs, 74–75 H Heating improvements, 85 Hiring help, 51, 112, 134–135 Hobby business rules, 32–36 HomeAway, 133 Home mortgage interest, 55 Home office deduction, 45, 49–51 Home sale tax exclusion, 11–12 INDEX | 175 Host service fees, 44 Hotel business rules, 13, 18, 149–153 Hotel expenses, 48 Hotel tax, 18–20 IRS Form 1099 K, Payment Card and Third Party Network Transactions, 28, 132–133 IRS Form 1099-MISC (payments to hired workers), 112, 134–138 Improvements IRS Form 4419, Application deducting, 31, 45 for Filing Information depreciation of, 79, 85–86 Returns Magnetically/ vs repairs, 62, 71–73 Electronically, 136 Incidental materials and IRS Form W-9, Request for supplies, 92 Taxpayer Identification Income potential, 1–2 Number and Certification, Income reporting, 113–114 9, 138 See also Tax reporting IRS hot buttons, 43 Income taxes, 6–12 IRS Schedule C, Profit or estimated tax requirements, Loss From Business, 13–14, 9–10 15 expense deductions, IRS Schedule E, overview, 6–7 Supplemental Income and rental income, Loss, 110–129 selling your home, 10–12 expense tracking, 160–162 state, filing exemptions, 125–127 Independent contractors, line-by-line instructions, 112, 134–138 113–118 Information returns, 132 overview of filing, 110–112 Insulation improvements, 85 rental loss reporting, 119–123, Insurance claims, 58 145–148 Insurance costs, 56–57, 115 rental summary (lines 21-26), Interest, home mortgage, 118–119 55, 108, 116, 148–149, repair and maintenance 152–153 deductions, 74 Interest, security deposit, sample form, 128–129 investment activities, 34–35 sample Worksheet 5-1, 122 IRS FIRE Production tax-free short-term rental System, 136 exception, 28 unmarried co-owners, 37 I J Joint qualified venture status, 125–126 Joint tenants, 38 L Land depreciation, 79, 81 Land improvements, 79 Landlord tax rules, Laundry expenses, 48 Laundry income, Legal expenses, 51–52 Liability protection, 38 Licenses, 44 Limited liability company (LLC) owners, 38–39, 110, 127 Listed property, 165–166 Listing fees, LLC, one-person, 38, 110 Loan interest deductions, 55 Local laws, 18–20, 44 Local transportation expenses, 45–46, 114, 166–169 Lockbox fees, 53 Lodgers, full-time, 143 Lodging expenses, 48 Lodging tax, 18–20 Long-distance travel expenses, 46–49, 114, 169–171 Long-term assets, 78–98 asset records, 164–165, 166 converted personal property, 97–98 deducting, 31, 89 176 | TAX GUIDE FOR SHORT-TERM RENTALS: AIRBNB, HOMEAWAY, VRBO & MORE de minimis safe harbor, 89–91 materials and supplies, 91–92 Section 179 expensing, 93–94 website development costs, 44 See also Depreciation Losses, casualty, 57–59 Losses, rental income See rental losses O Obamacare, 16 Occupancy taxes, 18–20 $1 million building value limit rule, 66 One-person LLC, 38, 110 Online payment services, 53 Online resources IRS, 10 IRS FIRE system, 136 Nolo updates, occupancy taxes, 19 repair regulations, 71 state taxes, Maintenance deductions, 31, tax forms, 136 64, 68–70, 74, 106 Operating expenses, 42–59 Management companies, 33, advertising and marketing, 51, 115 44 Marketing expenses, 44 allocation for personal use, Masters exemption, 22 54–59 Materials deductions, 91–92 car/local transportation, Meal expenses, 48, 169–171 45–46 Medicare taxes, 12–16 defined, 42–43 Mileage deductions, 45–46, entertainment, 52 167–168 gifts, 52 Mortgage interest, 108, 116, government licenses/fees, 44 148–149, 152–153 guest amenities, 52 Multiple hosts, 25–26 See hiring help, 51 also Co-owners home office deduction, Multiple properties, 25 49–51 legal/professional services, 51–52 Net income, long-distance travel, 46–49 Net Investment Income Tax maintenance, 31, 64, (NII), 16–18 68–70, 74, 106 Nolo updates, miscellaneous, 53 Not-for-profit rental, 35–36, overview on deducting, 30, 127, 153 43 M N rental website fees/ commissions, 44 start-up expenses, 53–54 See also Repairs Ordinary and necessary expenses, 42 Outdoor fixture expenses, 86 P Parking costs, 56 Parking fee income, Pass-through businesses, 38–39 PayPal charges, 53, 132–133, 135 Payroll taxes, 10, 15–16 Percentage of personal use, Personal labor value, 63 Personal property classification of, 88 in common areas, 88 converted to rental use, 97–98 deducting losses, 59 de minimis safe harbor, 70–71, 89–91 depreciation of, 79–80, 87–89 materials and supplies, 91–92 Section 179 expensing, 93–94 Personal residence requirements, 11–12, 23 Personal tax status impact, 32–36 Personal use, listed property, 165–166 INDEX | 177 Personal use allocation See prorating deductions Personal use threshold, 143 Pet fees, Phone expenses, 52 Plumbing expenses, 85 Private mortgage insurance (PMI) premiums, 56–57 Professional services, 44, 51–52 Profit requirement, 33–36 Property, personal See Personal property Property classification, 82–83 Property damage, 57–59 Property in lieu of rent, Property management companies, 33, 51, 115 Property tax deductions, 56, 108, 116 Prorating deductions, 100–108 Bolton method, 108, 147–149 calculating days of use, 104–108 depreciation, 9, 86 determining percentages, 102–104 operating expenses, 32, 43, 54–59 overview of, 100–101 repairs, 63–64, 66–67 tax reporting, 113 travel mileage, 169 Q Qualified joint venture status, 125–126 Quarterly estimated taxes, 9–10, 15 Rental income reporting, 113–114 See also Tax reporting Rental income tracking, Real estate mortgage investment 162–163 conduits (REMICs), 111 Rent allocation, 54 Real estate professionals, 18, Rental losses, 140–155 155 category overview, 141–142 Real property, 79, 81 See also determining, 140–141 Depreciation hotel business rules, Reasonable expenses, 43 149–153 Recapture of depreciation, regular rental activity rules, Record keeping, 158–172 153–155 assets, 164–165 Schedule E reporting, income and expenses, 119–124, 145–148 160–163 Rental platform fees/ listed property, 165–166 commissions, 27, 44 local travel, 166–169 Rental property long-distance travel, classification, 82–83, 142 169–171 Rental property conversion, property usage, 172 12, 97–98 repairs, 75 Rental rates, 20, 105–106 requirements overview, Rental summary, 118–119 158–160, 163–164 Rental tax, 18–20 visitor logbook, 105, 172 Repairs, 62–75 Recovery periods, 82–83 damage by guests, 74–75 Regular depreciation, 95–96 de minimis safe harbor, Regular rental activity rules, 70–71, 89–91 153–155 documentation Regular use test, 50 requirements, 75, 116 REMICs (real estate vs improvements, 62, mortgage investment 71–73 conduits), 111 maintenance vs., 64 Rental as investment, 34–35 overview on deducting, 9, Rental bank account, 159, 164 31, 45, 63–65, 74 Rental business rules, 33–34 personal labor, 63 Rental casualty losses, 57–59 personal use allocation, 106 Rental income defined, safe harbor provisions, 65–68, 70 R 178 | TAX GUIDE FOR SHORT-TERM RENTALS: AIRBNB, HOMEAWAY, VRBO & MORE tax basis impact, 81 Reservation cancellation fees, Residency requirements, 11–12, 23 Restorations, 73 Roommate hosts, 25–26, 37 Room rentals, 24–25 Room tax, 18–20 Routine maintenance safe harbor, 68–70 Royalties reporting, 114 state and local, 18–20 tax status impact, 32–36 See also Income taxes Tax basis, 12, 47, 80–82 Tax collection services, 19, 20 Tax deductions See Expense deductions Taxes, property, 56, 108, 116 Tax-free rental exclusion (14-day rule), 22–28 casualty losses, 59 effects of qualifying, 26–28 multiple hosts, 25–26 multiple properties, 25 Safe harbor provisions overview of, 6, 22–24 de minimis, 70–71, 89–91 room rentals, 24–25 routine maintenance, Tax home, 46–47 68–70 Tax reporting, 110–129 small taxpayers (SHST), business entity, 126–127 65–68, 70 Form 1099 K, 28, 132–133 Sales tax, local, 18–20 Form 1099-MISC, 112, Sales tax exclusion, home, 134–138 11–12 Form 4419, 136 Sampling method, 168 guest services providers, 125 Schedule C, 13–14, 15 non-profit, 127 Schedule E See IRS qualified joint ventures, Schedule E 125–126 Seasonal use of home, 11 Schedule C, 13–14, 15 Section 179 expensing, SHST form, 68 93–94 spouses, 125–126 Security deposits, 8, 74–75 tax-free exclusion, 28 Self-employment taxes, W-9 application, 12–16 See also IRS Schedule E Selling your property, 10–12, Tax basics, 6–20 Tax return preparation costs, 87 IRS Schedule C, 15 51–52 SEO (search engine optimiNet Investment Income Tax Tax status impact, 32–35 zation) campaigns, 44 (NII), 16–18 TCC (Transmitter Control Service fees, 44 Social Security/Medicare, Code), 136 12–16 Telephone expenses, 52 S Services exclusion, 13–14, 125 Services in lieu of rent, Short-term rentals, taxfree See Tax-free rental exclusion (14-day rule) SHST (safe harbor for small taxpayers), 65–68, 70 Significant service provision, 13–14, 125, 150 Single-member LLC, 38, 110 Social Security taxes, 12–16 Spouse co-owners, 38, 48, 125–126 Square footage method, 50–51 Standard mileage rate, 46 Start-up expenses, 53–54, 81 State laws, 7, 18–20, 27, 44 Stolen property deductions, 57–59 Storage facility fees, 8, 53 Straight-line depreciation method, 84 Subscriptions, 53 Substantial services exclusion, 13–14, 125, 150 Supplies deductions, 91–92, 116 Suspended passive losses, 152 Swimming pool expenses, 79, 86 T INDEX | 179 1099 K, Payment Card and Third Party Network Transactions, 28, 132–133 1099-MISC (payments to hired workers), 112, 134–138 Theft loss deductions, 57–59 Third-party settlement organization (TPSO), 135 Third-party transactions, 53, 132–133, 135 Ticket expenses, 52 Tip expenses, 48 Tourist tax, 18–20 Transaction privilege tax, 18–20 Transient rental classification, 82–83, 93 Transient tax, 18–20 Transmitter Control Code casualty or theft losses, 59 (TCC), 136 loss deductions, 144–145 Transportation expenses, overview of, 142–143 local, 45–46, 114, 166–169 personal use threshold, 143 Travel expenses, long-distance, Schedule E reporting, 46–49, 114, 169–171 119–120, 145–146 $25,000 offset, 154–155 Vandalized-property claims, 57 Vehicle expenses, 45–46, 114 Unadjusted basis, 66 Vendor services, 51, 112, Uninsured losses, 58–59 134–138 Unmarried co-owners, 37 Visitor logbook, 105, 172 Unreasonable expenses, 43 VRBO, 133 Use calculations, Utility costs, 8, 56, 117 W-9 form, 9, 138 Website costs, 44 Vacation home rules, 142–149 Workers, hiring, 51, 112, Bolton method strategy, 134–135, 134–138 l 147–149 U W V ... GUIDE FOR SHORT- TERM RENTALS: AIRBNB, HOMEAWAY, VRBO & MORE T his chapter explains the type of taxes short- term rental hosts need to know about: • income taxes • Social Security and Medicare taxes... to pay estimated taxes to the IRS to prepay your income tax liability However, 10 | TAX GUIDE FOR SHORT- TERM RENTALS: AIRBNB, HOMEAWAY, VRBO & MORE if you work and have income tax withheld from... mylodgetax.avalara.com/taxcenter/usa You should also check your local government’s website for information about these local taxes 20 | TAX GUIDE FOR SHORT- TERM RENTALS: AIRBNB, HOMEAWAY, VRBO