As a landlord on Airbnb or a similar short-term rental site, you may enjoy the benefits of tax deductions based on these business activities. But of course, there's fine print to consider, as shown in these frequently asked questions.
I rent my apartment, and my landlord say he doesn't mind if I occasionally let a guest stay there while I'm away. I plan to use a service like Airbnb, HomeAway, or FlipKey. Are there tax deductions available to me in this situation?
Assuming your landlord has approved this arrangement (especially important if your lease prohibits subleases without your landlord's approval), there may be tax benefits to renting out your apartment. Here's how it works.
When you sub-lease your apartment, you become a landlord in your own right, and are entitled to deduct the expenses you thus incur as long as they are ordinary, necessary, and reasonable in amount. These might include:
The cost of items used by both your and your guests—such as utilities, Internet access, and cable TV—may be partially deductible. The amount you can deduct depends on the amount of time the item is used by your guests. For example, if you host guests for 30 nights out of the year, you’ll be able to deduct 8% of the annual cost of your utilities (garbage, electricity, water, gas), cable TV, and Internet service. (30 is 8% of 365 days.)
If you purchase new interior furnishings such as a bed, couch, or chairs, these costs are also deductible. How much you can deduct again depends on the percentage of time you rent your apartment. The cost of furniture and similar personal property must be depreciated—deducted a portion at a time—over five years.
It’s important to keep good records of all your deductible expenses. This includes receipts, credit card statements, cancelled checks, and so on. Absent such records, the IRS may disallow all or part of your deduction if it conducts an audit. By far, the main reason taxpayers lose deductions when audited is lack of adequate records.
I'd like to rent my house while I'm out of town during the winter holidays. Will I be able to deduct the expenses of this very small business?
You can deduct expenses associated with renting your home through Airbnb or a similar service (as described above) only if you do so for more than 14 nights per year. It sounds like you may not reach that amount.
But this isn’t so bad, because you also don’t have to pay any tax on the income you earn. You don’t even have to report it to the IRS. Nor do you need to file an IRS Schedule E with your tax return.
I occasionally rent out a room within my home on Airbnb. My Wi-Fi is thus critical to my business, both for communicating with guests and for offering this service to them while staying with me. Can I claim a tax deduction for this?
Assuming you rent out the room for more than 14 days per year (as described just above), you’ll be entitled to deduct your rental-related expenses from your income. However, there are strict limits on such deductions, to ensure that you don’t deduct personal expenses as rental expenses.
When you rent out a room in your home, the IRS permits you to deduct a portion of your expenses for your entire home, such as electricity, gas, heating oil, water, and trash removal.
However, the IRS does not allow deductions for personal expenses. For this reason, you cannot deduct the cost of your phone line, even if your tenant has unlimited use of it. But, if you install a second phone line just for your tenant’s use, the full cost is deductible as a rental expense.
It’s possible that the IRS could view your Wi-Fi service as similar to your first phone line. It’s a personal expense you have to pay even if you don’t have a tenant, and the fact that a tenant has use of it does not increase your cost. In this event, the cost might not be deductible. Unfortunately, the IRS has yet to provide guidance on this issue.
However, even if you are allowed to deduct Wi-Fi service fees, you’d have to allocate your expenses by time and space. Only the proportion of the expense that can be allocated to the space used by your tenants and the time they use it would be deductible.
First, you can only deduct an expense such as Wi-Fi in proportion to the amount of the home that is rented. You can use any reasonable method to do this allocation. The most common method is based on the number of rooms in your home, or its square footage.
Example 1: Jane rents a room in her house to a college student. The room is 10 × 20 feet, or 200 square feet. Her entire house has 1,200 square feet of floor space. Thus, one-sixth, or 16.67% of Jane's home is rented out. The maximum amount of her monthly Wi-Fi bill she can deduct is 16.67%.
Example 2: Instead of using the square footage of her house, Jane figures that her home has five rooms of about equal size, and she is renting out one of them. She determines that one fifth, or 20%, of her home is being rented. The maximum amount of her monthly Wi-Fi bill she can deduct is 20%.
As these examples show, you can often get a larger deduction by using the room method instead of the square footage of your home.
You must also allocate your deduction based on the amount of time the property served as a rental during the year, compared to the total time it was used during the year. You get no deduction for your expenses for days no one was renting your room.
Example: Jane lived in her home for 300 days during the year and rents it out for 65 days. The property was used as a rental 18% of the time (65 ÷ 365 = 18%). Thus, using a deduction based on the number of rooms (Example 2, above), Jane can deduct 18% of 20% of her total annual Wi-Fi bill. Thus, if Jane spent $800 on her Wi-Fi service during the year, she would be entitled to claim a deduction of $28.80 (20% x $800 x 18% = $28.80).
For more on this subject, see Tax Issues When Renting Your Home on Airbnb or VRBO.