General guidance on the taxation of rental income

28 Pages·2017·0.62 MB·English

Airbnb

General guidance on the taxation of
rental income
Airbnb | General guidance on the taxation of rental income
January 2017 v1

Disclaimer

This booklet was prepared by Ernst & Young LLP (EY) at the request of Airbnb. This
booklet is intended solely for information purposes and no Airbnb Host or other third
party may rely upon it as tax or legal advice or use it for any other purpose. As such,
EY and Airbnb assume no responsibility whatsoever to Airbnb Hosts or other third
parties as a result of the use of information contained herein. This booklet was
prepared by EY, and does not necessarily reflect the views of Airbnb.

This booklet contains information in a summary format. It does not provide tax
advice to any taxpayer because it does not take into account any specific taxpayer’s
facts and circumstances.

Readers are encouraged to consult with professional advisors for advice concerning
specific matters before making any decision or taking a position on any tax return, and
EY and Airbnb disclaim any responsibility for positions taken by taxpayers in their
individual cases or for any misunderstanding on the part of readers. While EY has used
its best efforts in preparing this booklet, it makes no representations or warranties with
respect to the accuracy or completeness of the contents of this booklet and specifically
disclaims any implied warranties. Neither Airbnb nor EY shall be liable for any loss of
profit or any other damages, including but not limited to direct, indirect, special,
incidental, consequential, or other damages in connection with the information
contained in this booklet.

Please refer to the Airbnb Responsible Hosting Page at
https://www.airbnb.com/help/responsible-hosting for additional general
information about hosting in the United States.

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Airbnb | General guidance on the taxation of rental income
January 2017 v1
Table of contents
Table of contents
1 Persons subject to US income tax ......................................................................... 3
2 Rental income ..................................................................................................... 3
3 What tax information will Airbnb provide ............................................................... 5
4 Expenses that can be deducted ............................................................................ 5
5 Proration of rental expenses ................................................................................ 7
6 Repairs & maintenance v. improvements – deduct or capitalize ............................... 12
7 Depreciation ....................................................................................................... 13
8 Limit on rental losses .......................................................................................... 14
9 How to report rental income and expenses ............................................................ 16
10 How to report deductible personal expenses .......................................................... 17
11 Reporting payments to independent contractors ................................................... 17
12 How is (net) rental income taxed (Federal) ............................................................ 17
13 How is (net) rental income taxed (States) .............................................................. 17
14 Quarterly estimated tax payments ........................................................................ 17
15 Sale of home used as rental property .................................................................... 17
16 Documents to be retained .................................................................................... 18
17 Useful References ............................................................................................... 20
Exhibit A Schedule E (Form 1040) ................................................................................. 21
Exhibit B Schedule A (Form 1040) ................................................................................. 22
Exhibit C 2016 Tax rates for individual taxpayers ........................................................... 23
Exhibit D 2015 Tax rates for individual taxpayers ........................................................... 25
Disclaimer
This booklet is intended solely for information purposes and no Airbnb Host or other third party may rely upon it as tax or legal advice or use it for any
other purpose. As such, EY and Airbnb assume no responsibility whatsoever to Airbnb Hosts or other third parties as a result of the use of information
contained herein. This booklet was prepared by EY, and does not necessarily reflect the views of Airbnb. Please refer to the disclaimer on page 1 for
more information. 2
Airbnb | General guidance on the taxation of rental income
January 2017 v1

1. Persons subject to US income tax

I am an Airbnb host. Am I subject to income tax in the U.S.?
You are subject to U.S. income tax if you have U.S.-source income. Generally, income derived from U.S.
assets, such as rental properties located in the U.S., is U.S. -source income and subject to U.S. income
tax.
Domestic rental income (i.e. rental income from a
property located inside the U.S.) is taxable in the U.S.
regardless of where the person in receipt of that
income resides. For example, an individual living
outside the U.S. who is in receipt of rental income
from a U.S. property is still subject to tax in the United
States.
Foreign rental income (i.e. rental income from a
property located outside the U.S.) is taxable in the
U.S. if the host is a U.S. citizen or permanent resident.
An individual in receipt of foreign rental income
should engage a tax advisor to ensure that rental
income is correctly reported and any tax due is paid
timely.

Types of taxpayers: cash-basis vs. accrual basis
If you are subject to U.S. income tax, you must report your rental income as a cash-basis or accrual-
basis taxpayer.
If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or
constructively receive it and you deduct all expenses in the year you actually pay them. You are a cash-
basis taxpayer if you report income in the year you receive it, regardless of when it is earned. Most
individuals are cash-basis taxpayers. You constructively receive income when it is made available to
you, for example, by being credited to your bank account.
If you are an accrual-basis taxpayer, you generally report income when you earn it instead of when you
receive it and you deduct expenses when you incur them instead of when you pay them. Accrual-basis
taxpayers should engage a tax advisor to ensure that rental income and expenses are correctly
reported.
2. Rental income

If you are subject to U.S. income taxes, you must include in your gross income all amounts you receive
as rent. ‘Rent’ is the gross amount of payment received (before any expenses are deducted) for the use
or occupation of property. It can also include payments received for any goods or services that are
provided, e.g. meals, cleaning, etc.
Taxable rental income is the gross amount of rent received less any allowable expenses. This can also
be referred to as ‘net’ rental income. If the allowable expenses are greater than the gross amount of
Disclaimer
This booklet is intended solely for information purposes and no Airbnb Host or other third party may rely upon it as tax or legal advice or use it for any
other purpose. As such, EY and Airbnb assume no responsibility whatsoever to Airbnb Hosts or other third parties as a result of the use of information
contained herein. This booklet was prepared by EY, and does not necessarily reflect the views of Airbnb. Please refer to the disclaimer on page 1 for
more information. 3
Airbnb | General guidance on the taxation of rental income
January 2017 v1

rent received, a rental loss will arise. Taxable rental income/(loss) must be reported and calculated on
Schedule C or E of Form 1040 (see section 9 “How to report rental income and expenses”).
In addition to the amounts you receive as normal rent payments, you may also receive other amounts
that should be carefully considered in determining the amount of gross rental income to report.
Examples of such amounts include:
• Advance rent is any rent you receive before the period that it covers. Include advance rent in
your rental income in the year you receive it regardless of the period covered or if you are a
cash or accrual basis taxpayer. For example, if you receive rent in December 2016 that is
intended for January 2017, you must include it in rental income in 2016.
• Security deposits are not included in rental income if you have restricted use of the money.
For example, if you have to return security deposit to guests at the end of their stay, it is not
included in rental income. If you keep part or all of the security deposit because a Guest
damaged the property and you must make repairs, include the amount you keep in that year in
rental income if you deduct the cost of repairs as expenses. To the extent the security deposit
reimburses those expenses, do not include the amount in rental income if you do not deduct
the cost of repairs as expenses.
• If a Guest pays any of your expenses, for example, utilities expenses, the payments are rental
income. Since you must include this amount in income, you can deduct the expenses if they are
deductible rental expenses (defined in section 4 “Expense that can be deducted”).
• If a Guest cancels a reservation and you receive a portion of the accommodation fee, the
amount you receive is rent. Include the payment in your income in the year you receive it.
• Any rent refunded to a Guest due to cancellation is not included as net rental income. Tax
documents, such as 1099-K, are reported on a gross basis. Any gross rent that is refunded
should be included as gross rental income and also taken as a deduction.
Example: You receive a payout of $5,000 for a Guest’s 10-day stay. The Guest only stays for 8
days and you offer a $1,000 refund via Airbnb. A $1,000 “adjustment” is placed on your
account and automatically deducted from your next scheduled payout of $5,000 for another
Guest’s stay. Your total payout is $9,000 ($5,000 - $1,000 + $5,000). Your gross rental
income is $10,000 and reported as such on your 1099-K or Earnings Summary. On your tax
return, you report $10,000 as gross rent and $1,000 as a deduction to arrive to net rental
income of $9,000.
Exemptions:
If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary
function is not considered to be rental. You are not required to report the rental income and rental
expenses from this activity on Schedule C or E (Form 1040). The expenses, including qualified
mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed
on Schedule A (Form 1040). See the Instructions for Schedule A (Form 1040) for more information on
deducting these expenses.

Disclaimer
This booklet is intended solely for information purposes and no Airbnb Host or other third party may rely upon it as tax or legal advice or use it for any
other purpose. As such, EY and Airbnb assume no responsibility whatsoever to Airbnb Hosts or other third parties as a result of the use of information
contained herein. This booklet was prepared by EY, and does not necessarily reflect the views of Airbnb. Please refer to the disclaimer on page 1 for
more information. 4
Airbnb | General guidance on the taxation of rental income
January 2017 v1

A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or
similar property. It also includes all structures or other property belonging to the dwelling unit. A
dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. A
dwelling unit does not include property (or part of the property) used solely as a hotel, motel, inn, or
similar establishment. Property is used solely as a hotel, motel, inn, or similar establishment if it is
regularly available for occupancy by paying customers and is not used by an owner as a home during
the year.
3. What tax information will Airbnb provide

An Airbnb host can refer to this Airbnb Help Center article at
https://www.airbnb.com/help/article/414/what-tax-forms-should-i-expect-to-receive-from-
airbnb?topic=248 as a guide to determining what tax forms Airbnb may provide to assist with reporting
gross rental income for any calendar year.
4. Expenses that can be deducted

As outlined above, taxable rental income is the gross amount of rent received less any allowable
expenses. In general, a deductible or allowable expense is one that is ordinary and necessary, has
actually been paid (for a cash basis taxpayer) and is not regarded as capital in nature. Examples of
deductible expenses include:
► Advertising
► Cleaning and maintenance services, including laundry services and cleaning supplies purchased
► Utilities, i.e. gas, electricity, TV, Internet, bin collection, etc.
► Property insurance, in addition to building and content cover, a deduction can also be claimed
for private mortgage insurance (PMI) premiums on rental property. However, if you prepay PMI
premiums for more than one year in advance, for each year of coverage you can deduct only
part of the PMI payment that will apply to that year
► Property taxes related to the rental property
► Interest on a loan/mortgage taken out to buy or improve the rental property
► Fees paid to collect rent, e.g. service fees charged by Airbnb
► Ordinary and necessary travel and transportation
► Repairs, i.e. fixing broken windows, doors, furniture and machines, etc. (See section 6 “Repairs
& maintenance vs. improvements – deduct or capitalize”)

► Depreciation on amounts paid to acquire the property and to make subsequent improvements
(See section 6 “Repairs & maintenance vs. improvements – deduct or capitalize” & section 7
“Depreciation”)
Disclaimer
This booklet is intended solely for information purposes and no Airbnb Host or other third party may rely upon it as tax or legal advice or use it for any
other purpose. As such, EY and Airbnb assume no responsibility whatsoever to Airbnb Hosts or other third parties as a result of the use of information
contained herein. This booklet was prepared by EY, and does not necessarily reflect the views of Airbnb. Please refer to the disclaimer on page 1 for
more information. 5
Airbnb | General guidance on the taxation of rental income
January 2017 v1

► Amortization of points paid to acquire a mortgage on the rental property
► The cost of managing the property, i.e. legal fees and accountancy fees incurred by the host in
connection with renting the property. Homeowners’ association (HOA) fees are also deductible
► Payments made to Guest in the form of refunds (in the event of a reservation cancellation or
alteration, or through Airbnb’s Resolution Center).
► Registration fees for relevant conferences or education on property management (i.e. Airbnb
Open)
► Rental payments, e.g. rent paid to landlords by tenant hosts
This list is not exhaustive. Please refer to IRS Publication 527 “Residential Rental Property” for a
more detailed discussion on deductible rental expenses.
Example of deductible travel expenses: You are a U S host with a listing in Florida. If you take a 1-week
trip to Florida and spend 1 day inspecting your rental property, no non-local transportation expenses
are deductible. If, on the other hand, 6 of the 7 days are used to repair and attend to the property, all
non-local transportation expenses are deductible. In both cases, local transportation expenses incurred
traveling to and from the property are deductible. However, if a stretch limousine is rented for the local
travel, more than likely the IRS would not consider the expense an “ordinary” expense. Any deduction
allowed would be limited to the amount that would be considered “ordinary,” such as the cost of a
rental car or cab fare.
Disclaimer
This booklet is intended solely for information purposes and no Airbnb Host or other third party may rely upon it as tax or legal advice or use it for any
other purpose. As such, EY and Airbnb assume no responsibility whatsoever to Airbnb Hosts or other third parties as a result of the use of information
contained herein. This booklet was prepared by EY, and does not necessarily reflect the views of Airbnb. Please refer to the disclaimer on page 1 for
more information. 6
Airbnb | General guidance on the taxation of rental income
January 2017 v1

5. Proration of rental expenses

Generally, only allowable expenses incurred during the period the property is used or held out for
rental purposes can be deducted against rental income. If you use or hold out the property for rental
purposes for the entire year, all your allowable rental expenses are deductible. For Hosts, however,
there may be scenarios where only a portion of the house or apartment is rented and/or the house or
apartment is rented for only a portion of the year. Proration of allowable rental expenses becomes
necessary in these scenarios. The following decision tree helps you determine when and how to prorate
your rental expenses in various scenarios. A more detailed discussion related to proration of rental
expenses follows.
(A) Is the unit listed a “dwelling unit”? See full definition in section 2 “Rental income”.
No Yes
NOT a dwelling unit A dwelling unit

(Unit is exclusively used for rental) (Used for both personal and rental)
Skip to question (E)

(B) Is the unit used for personal purposes for more than the greater of 14 days or 10% of the total days the unit is rented to others at a fair rental price?
See definition of “fair rental price” in section 5(B) “Personal use of dwelling unit (including vacation home)”
No Yes
NOT considered a Considered a home

home
Skip to question (D)

(C) Is the unit rented for 15 days or more?

No Yes
Do not report rental income or Report rental income and
expenses on your return (but you allowable expenses on
may be able to deduct certain your return
expenses elsewhere on your
return, for example real estate Go to question (D)
taxes)

(E) Are you renting a spare room/portion of house/apartment or your (D) Are you renting a spare room/portion of house/apartment or your
entire house/apartment? entire house/apartment?

ENTIRE HOUSE OR SPARE ROOM/PORTION OF HOUSE SPARE ROOM/PORTION OF HOUSE OR ENTIRE HOUSE OR
APA RTMENT OR APARTMENT (EXCLUSIVELY APARTMENT – pro-rate allowable rental APARTMENT – pro-rate
(EXCLUSIVELY FOR RENTAL) – pro-rate allowable expenses by (a) the number of rooms in allowable rental expenses
FOR RENTAL) – rental expenses by (a) the number the unit or (b) the square footage of the by total number of days

report all your of rooms in the unit or (b) the unit. See section 5(A) for full discussion actually rented at a fair
allowable rental square footage of the unit. See AND by total number of days actually rental price/total number
ex penses section 5(A) for full discussion rented at a fair rental price/total number of days the dwelling unit
of days the dwelling unit is used. See is used. See section 5(B)
section 5(B) for full discussion for full discussion
Disclaimer
This booklet is intended solely for information purposes and no Airbnb Host or other third party may rely upon it as tax or legal advice or use it for any
other purpose. As such, EY and Airbnb assume no responsibility whatsoever to Airbnb Hosts or other third parties as a result of the use of information
contained herein. This booklet was prepared by EY, and does not necessarily reflect the views of Airbnb. Please refer to the disclaimer on page 1 for
more information. 7
Airbnb | General guidance on the taxation of rental income
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I. Renting part of the property
If you rent part of your property, you must divide certain expenses between the part of the
property used for rental purposes and the part of the property used for personal purposes, as
though you actually had two separate pieces of property.
You can deduct the expenses related to the part of the property used for rental purposes. You
can also deduct as rental expenses a portion of other expenses that normally are nondeductible
personal expenses, such as utilities. The two most common methods for dividing an expense
are based on (1) the number of rooms in your home, and (2) the square footage of your home
You do not have to pro-rate any expenses that are exclusively related to the rental part of your
property. For example, if you paint a room that you rent, the entire cost is a rental expense.
Even though you cannot deduct the portion of allowable expenses for personal purposes
against rental income, certain personal expenses, such as home mortgage interest and real
estate taxes, can be deducted on Schedule A if you itemize your deduction (see section 10
“How to report deductible personal expenses”).
Example: You list your spare room in your house. The spare room is 200 square feet and the
rest of the house is 800 square feet. You incur the following expenses:
Repainting the spare room - $500
Replacing broken window in the spare room - $500
Property tax and mortgage interest - $5,000
Internet, electricity and water - $1,000
Expenses for painting the spare room and replacing broken window in the spare room are
exclusively related to the rental part of your house and hence these expenses are fully
deductible rental expenses.
Expenses for property tax, mortgage interest, internet, electricity and water are not exclusively
for the rental part of your house, but for the entire house. You have to pro-rate these expenses
based on a reasonable method. If you pro-rate your expenses based on the square footage of
the house, the fraction of expenses for rental purposes is 20% (200/1,000 sq. ft.) The amount
of deductible rental expense is $1,200 ($6,000 * 20%). Property tax and mortgage interest of
$4,000 [$5,000 * (1-20%)] can be deducted on Schedule A if you itemize your deduction.
Internet, electricity and water expenses of $800 [$1,000 * (1-20%)] are considered personal
expenses and not deductible.
II. Personal use of dwelling unit (including vacation home)
If you have any personal use of a dwelling unit (including a vacation home) that you rent out,
you must divide your expenses between rental use and personal use. In general, your rental
expenses will be no more than your total expenses multiplied by the following fraction:
total number of days actually rented at a fair rental price
total number of days the dwelling unit is used
Disclaimer
This booklet is intended solely for information purposes and no Airbnb Host or other third party may rely upon it as tax or legal advice or use it for any
other purpose. As such, EY and Airbnb assume no responsibility whatsoever to Airbnb Hosts or other third parties as a result of the use of information
contained herein. This booklet was prepared by EY, and does not necessarily reflect the views of Airbnb. Please refer to the disclaimer on page 1 for
more information. 8
Airbnb | General guidance on the taxation of rental income
January 2017 v1

You must also determine if the dwelling unit is considered a home. The amount of rental
expenses that you can deduct may be limited if the dwelling unit is considered a home. Whether
a dwelling unit is considered a home depends on how many days during the year are considered
to be days of personal use. If you used the dwelling unit as a home and you rented it for less
than 15 days during the year, any income generated is excluded from rental income and any
rental expenses are not deductible.
If you use a dwelling unit for both rental and personal purposes, divide your expenses between
the rental use and the personal use based on the number of days used for each purpose.
When dividing your expenses, follow these rules.
► Any day that the unit is rented at a fair rental price is a day of rental use even if you used the
unit for personal purposes that day. This rule does not apply when determining whether you
used the unit as a home.
► Any day that the unit is available for rent but not actually rented is not a day of rental use.
Example: Your beach cottage was available for rent from June 1 through August 31 (92 days).
During that time, except for the first week in August (7 days) when you were unable to find a
renter, you rented the cottage at a fair rental price. The person who rented the cottage for
July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent.
Your family also used the cottage during the last 2 weeks of May (14 days). The cottage was
not used at all before May 17 or after August 31.
You figure the part of the cottage expenses to treat as rental expenses as follows:
• The cottage was used for rental a total of 85 days (92 less 7). The days it was available for
rent but not rented (7 days) are not days of rental use. The July weekend (2 days) you used it
is rental use because you received a fair rental price for the weekend.
• You used the cottage for personal purposes for 14 days (the last 2 weeks in May).
• The total use of the cottage was 99 days (14 days personal use + 85 days rental use).
• Your rental expenses are 85/99 (86%) of the cottage expenses.
If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental
expenses you figured earlier and rental income depends on whether you are considered to be
using the dwelling unit as a home.
You use a dwelling unit as a home during the tax year if you use it for personal purposes more
than the greater of:
► 14 days, or
► 10% of the total days it is rented to others at a fair rental price.

Disclaimer
This booklet is intended solely for information purposes and no Airbnb Host or other third party may rely upon it as tax or legal advice or use it for any
other purpose. As such, EY and Airbnb assume no responsibility whatsoever to Airbnb Hosts or other third parties as a result of the use of information
contained herein. This booklet was prepared by EY, and does not necessarily reflect the views of Airbnb. Please refer to the disclaimer on page 1 for
more information. 9