As a landlord on Airbnb or a similar short-term rental site, you might 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.
Assuming your landlord has approved this arrangement (especially important if your lease prohibits subleases without your landlord's approval), there might 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 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—might be partially deductible. The amount you can deduct depends on the amount of time your guests use the item. 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 can always be depreciated—deducted a portion at a time—over five years. However, you also have the option of deducting the cost in a single year with Section 179 expensing, bonus depreciation, or the de minimis deduction for items that cost less than $2,500.
It's important to keep good records of all your deductible expenses. This includes receipts, credit card statements, canceled 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 the lack of adequate records.
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 might 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 if you rent out your home for 14 days or less during the year. 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.
Assuming you rent out the room for more than 14 days per year, 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 can't deduct the cost of your landline phone, even if your tenant has unlimited use of it. But, if you install a second landline just for your tenant's use, the full cost is deductible as a rental expense.
It's possible that the IRS could view your internet 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 doesn't increase your cost. In this event, the cost might not be deductible. Unfortunately, the IRS has yet to provide guidance on this issue.
But even if you are allowed to deduct internet 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 internet 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. So, one-sixth, or 16.67% of Jane's home, is rented out. The maximum amount of the monthly internet 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 the monthly internet 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%). So, using a deduction based on the number of rooms (Example 2, above), Jane can deduct 18% of 20% of her total annual internet bill. Thus, if Jane spent $800 on her internet 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.