The best type of income is tax-free income. Ordinarily, any rental income you receive is taxable. However, there is one little known exception that can be particularly useful.
You can rent out all or part of your home or apartment for up to 14 days per year and all the rental income you receive is tax free, no matter how much you earn. In fact, you don’t even have to report the income to the IRS. However, because of reporting laws, companies like Airbnb, HomeAway and VRBO may report to the IRS all income you receive from short-term rentals, even if you rent for less than two weeks.
Tax free rental income?
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.
If you rent your main residence (house or apartment) for more than 14 days during the year, and live in it 15 days or more, you won’t qualify for the tax-free treatment described above. Instead, you’ll have to report and pay income tax on your rental income.
Short-term rentals of all or part of your home has become a much more common revenue stream for many. Often services such as Airbnb or one of the many others is used. I will just use the term Airbnb for this discussion. This now makes a much more interesting type of transaction on your income tax return. Now more questions need to be asked to determine how IRS will treat this on your tax return. There is a difference between Schedule E rental income and Schedule C business income. Factors to look at are: 1.) the length of the rental period, seven days or less, and 2.) if you provide any personal services during the stay such as cleaning, providing food, or changing linens.
Why does it matter? If it is on the Schedule E for rental income, your losses can be limited because by default it is considered passive income. If you have over $150,000 total income from other sources, the losses will be suspended.
If it is on the Schedule C this is considered business income, much like a hotel would be treated. Your losses will not be limited. However, if you have a profit, it will be subjected to self-employment tax (15.3%). You would also need to look at your local regulations regarding Occupancy Tax, just as hotels are required to charge.
Learning More on Real Estate Investing
If you want to garner more insight prior to diving deep into the real estate investment market, I invite you to attend “Real Estate Investing 101”. It’s a one-day-only event featuring experts from the real estate investment field including a mortgage broker, a real estate agent, a settlement company, an insurance agent, a land lord association, a property management company, and of course, me, to explain the tax implications.
“Real Estate Investing 101” is NOT a sales event! This is an interactive, informational, let’s-get-to-the-nitty-gritty kind of education based on the topics that most real estate investors need to know! My purpose in hosting this event is to help you avoid an unwanted tax surprise.
“Real Estate Investing 101” will be held at the office of Saunders Tax & Accounting in Hagerstown, MD on Saturday, May 14, 2022, from 8 am until 1 pm. The cost for this 5-hour workshop is $59 and includes a networking lunch. Seating is limited, so be sure to register before the May 11th deadline if you are interested. For additional information including a course agenda, visit https://saunderstax.com/REInvesting.php.