If you rent property short-term through an online rental service like Airbnb, HomeAway, VRBO, or others, you need to know how the tax laws affect you. Fortunately, the changes brought about by the Tax Cuts and Jobs Act (“TCJA”) are mostly good for short-term rental hosts. Here are some ways the law has changed for hosts.
The TCJA created a brand new tax deduction for individuals who earn income from businesses owned individually or by pass-through entities like limited liability companies or partnerships, which includes almost all short-term rental hosts. If your short-term rental activity qualifies as a business for tax purposes, as most do, you may be eligible to deduct up to 20% of your net rental income from your income taxes. This is in addition to all your other rental-related deductions.
You need not spend any additional money or buy any new property to qualify for this deduction. How much you'll be able to deduct, however, depends on your taxable income and how much you earn from your rental activity. For higher income taxpayers, the deduction is limited to 2.5% of the cost of their rental property plus 25% of amounts paid to employees (which for short-term hosts is usually zero).
When you buy personal property like new furniture or appliances for your rental activity, you get to write off all or part of the cost as a rental expense. The TCJA makes this easier than ever before. During 2018 through 2022, hosts will be able to use 100% bonus depreciation to write off in a single year the full cost of long-term personal property they use for their rental business. Bonus depreciation may now be used for both new and used personal property. It may not be used for real property.
Hosts can also use a provision of the tax code called Section 179 to deduct in one year up to $1 million of personal property purchased for rental units. However, Section 179 may be used only for property that is used over 50% of the time for the rental activity, which limits its use by many short-term hosts who live in their property a majority of the time.
The TCJA limits the personal mortgage interest deduction to interest on $750,000 of acquisition indebtedness, a reduction of $250,000 from prior law which permitted interest to be deducted on up to $1 million. The itemized personal deduction for real property taxes is limited to a maximum of $10,000. Under prior law, there was no limit on this deduction. The limits on the personal itemized deductions for home mortgage interest and property taxes do not apply to rental businesses. Thus, the portion of a rental host's mortgage interest and property tax allocated to the short-term rental activity don't come within the limits. These are rental deductions, not personal itemized deductions.
Operating an activity classified as a hobby for tax purposes has always been a tax disaster; under the TCJA, it is now a tax apocalypse. Under prior law, expenses from a hobby could be deducted as a personal itemized deduction on IRS Schedule A to the extent they exceeded 2% of the taxpayers adjusted gross income. However, these deductible hobby expenses could not exceed hobby income. The TCJA completely removes the personal deduction for hobby expenses. This means that while the income from a rental activity classified as a hobby must be reported and tax paid, no expenses may be deducted.
The vast majority of rental activities qualify as businesses or investment activities. However, rentals that are not profit-motivated must be classified as not-for-profit activities or hobbies.
Almost all short-term hosts pay income tax on their rental profits at their individual tax rates. The TCJA reduced individual income tax rates for almost all taxpayers. So you'll pay less tax on your profits in 2018 and later.
For more details on taxes for short-term rental hosts, refer to Tax Guide for Short-Term Rentals: Airbnb, HomeAway, VRBO and More, by Stephen Fishman (Nolo).