When the money starts rolling in you need to think about your tax liability. Smart financial decisions mean the difference between huge profits and huge headaches. Don’t wait to get organized around accounting, insurance, and taxes.
In this article I outline what you need to know to account for your Airbnb rental and calculate your Airbnb tax liability. I also discuss Airbnb insurance and the different options you have to protect yourself.
Airbnb Taxes in the United States
Individual tax liabilities and local policies vary. But here’re a few tips to help you limit your tax payments and avoid a visit from Uncle Sam.
Airbnb Rentals for Under Two Weeks
If you rent out your property for 14 days or less, you’re not required to pay ANY taxes on this income. This is often called the Master’s Exemption because it became popular with hosts renting out their place during the Master Golf Tournament.
Here’s a fun video from the Wall Street Journal about how to report this 1099 income on your tax return.
Personal Use vs. Rental Use
You can write-off expenses relating to your rental property. But only allowable expenses incurred during the time your property is used for rental purposes.
If you rent out your property for the entire year, all your allowable rental expenses are deductible. If you rent out your property for only part of the year, then you need to divide your expenses between rental use and personal use.
You can find a detailed explanation of how to correctly calculate your Airbnb expense deductions in this guide by Ernst & Young.
I can’t stress enough how important it is to understand everything that can be written off and to keep good records for reporting your Airbnb taxes. Here’s a list of potential deductions:
- Cleaning Supplies
- Cleaning Fees
- New Furnishings (50% value in the first year)
- Home office space
- Local travel expense for gas and vehicle expenses
- Interest on your mortgage or credit cards used to purchase goods or services
- Depreciation on all property in the unit (see IRS Details)
- Legal and Professional Services
Not all of these may be tax deductible in your situation. Refer to the IRS website for further details about property taxation.
Reported Airbnb Income
Airbnb will request your personal taxpayer information and may provide a 1099 at the end of the year. Currently, Airbnb issues a 1099 to US hosts who have earned over $20,000 and had 200+ reservations. If you don’t receive a 1099 for the tax year, you can find your total Airbnb income in your Earnings Summary under Transaction History.
Note: if you do not provide your tax information, Airbnb may withhold 28% of your earnings.
Tracking Airbnb Expenses
Tracking your Airbnb expenses throughout the year will help ease your stress come tax season.
I recommend setting up a separate account where you receive all of your Airbnb payments via PayPal. Link your rent, utilities and monthly expenses to this account. If you need to take money out of the business to pay yourself, try to do so in regular time periods and in standard amounts. This makes it easier to report your income and explain it to an auditor.
If you purchase anything for your rental property, use the dedicated account and keep the receipt. Also keep your personal purchases separate from your business purchases.
Specialized Vacation Rental Tax Services
Avalara offer specialized services for vacation rental home owners. If you prefer to have someone else figure our your tax liabilities, then check them out.
In the summer of 2011, the issue of liability became a contentious point for Airbnb. A host reported having her house ransacked and much of her property stolen. In response, Airbnb announced its “1,000,000 Host Guarantee.” This promises to protect hosts with a one million dollar insurance policy for “every booking, every time.”
The Airbnb host guarantee provides protection for up to one million in damages to eligible property (for hosts in certain countries). The Host Guarantee does not protect cash and securities, pets, personal liability, shared or common areas. Airbnb only pays out under this program, after detailed review of your case and after you have collected from your own insurance policy.
Airbnb also has “Host Protection Insurance.” This program provides hosts in specified countries with liability protection up to one million per occurrence.
Both programs have limitations and it’s a good idea to look into acquiring your own insurance coverage. Selecting the right coverage for your type of rental ensures that you are covered in case of personal injuries, fire/flood, and natural disasters. With the right insurance policy you can even be compensated for lost income due to your property becoming uninhabitable.
Landlord Property Insurance protects against events that a homeowner’s policy typically won’t cover. For instance, liability protection is important for second-home owners who plan to rent to guests. As a landlord, you’re at risk of lawsuits and claims of injury and damage occurring on your property. Further if your vacation rental property is furnished, you can individualize your policy with personal property coverage.
Vacation Rental owners know better than anyone how many events can damage a rental unit—everything from fire, wind and hail to water damage caused by a fire protection system. If your property becomes uninhabitable, you may miss out on rental income for months at a time–an income loss that can be devastating.
Fair Rental Income protection covers lost rental income in the event that your property becomes uninhabitable due to certain covered losses.
Because each vacation rental property is unique, you should speak with a representative to design a policy that is best for your circumstances. It’s difficult to know who offers the most favorable service and rates. So make sure you do your research.
I had a theft occur in-between guests at one of my apartment buildings and my experience with Liberty Mutual was smooth and easy. I received over $5,000 in cash plus some replacement items in less than two weeks.
Another option is CBIZ. They specialize in vacation rental insurance.
In summary, it pays to understand your Airbnb tax liabilities and insurance requirements. Neither is difficult to get to grips with. Taking a few precautions will help you enjoy a successful and profitable career as an Airbnb host.