June 4, 2015
4 Things Airbnb Owners Should Consider About Rental Income Tax
Whether you are managing or looking to buy, a second home is a great investment goal. You need to be sure to think carefully through the potential implications of how you manage your Airbnb.
Is This a Short-Term Rental Opportunity or True Second Home?
Usage and financial need should determine the answer to this question. Renting, of course, can generate rental income to help defray property costs, which could impact the price you are willing to pay. HomeAway, a vacation rentals listing exchange, reports that rental owners earn an average annual rental income of $27,360 – not a bad perk.
However, you will also have additional expenses, like utilities, maintenance, repairs, upgrades, yard work, home owners association fees and more. When considering the purchase of a second home, you need to factor in all the costs to determine affordability.
Before you buy, remember to think through how your usage options may impact the bottom line—whether that means renting the property for most of the year and only using it yourself on occasion, or using the property often and renting it out infrequently.
What Are the Tax Implications of Renting Out a Home?
If you rent out the home, you will have income tax on rental income, but second homeowners may also qualify for various tax benefits. This includes deductions for items like mortgage interest, real estate taxes, casualty losses, management fees, maintenance, utilities, insurance and depreciation.
You may qualify if you rent your furnished property for more than 14 days per year. However, while all of your rental income is taxable, only a portion of your expenses—prorated for the number of days you rent out the property—may be deducted.
In addition, you may have to pay transient occupancy taxes, which are similar to those incurred by hotels. In some locales, the property may be taxed differently (perhaps at a different rate than a commercial property), depending on its rental use.
Keeping the accounting straight may seem tough, but you can work with a professional Airbnb management company to help you stay in compliance with proper accounting of income and the remittance of local occupancy taxes.
Who or What Entity Will Own the Home?
Think through the implications of each of your options for title ownership and what’s best for your individual situation. Some options include:
- The property is in your name: Growing your estate with the addition of a second home could change your estate plans, if that’s a consideration for you. Keep in mind that, in 2015, if you pass on total assets worth less than $5.43 million from one person, or $10.86 million from a couple, the estate is generally not taxable and free of federal taxes. Your taxable estate may be reduced through deductions, which might include items such as mortgages, estate administrative expenses, and property passed to a surviving spouse.
- The property is a small business: If you create a limited liability company (LLC) for the property, which may be easily done through your accountant or attorney, membership interest can be transferred across owners more easily. Each LLC creates its own operating agreements, or rules, which are formulated to govern the property, its ownership, and all decisions pertaining to it. What this means is that if the LLC has multiple members, they must all agree to the same rules so there are no surprises. In addition, the LLC offers individual liability protection from potential issues. When structured to address an individual’s particular circumstances, high net worth individuals often find an LLC structure is preferred to direct ownership.
- The property is in a trust: If you anticipate issues with future costs of ownership and decision disputes, a trust can preserve the asset and access to it by heirs. All you have to do is create a trust that holds title to the property, which may be done through your accountant or attorney.
What Are My Exit Options?
As with any asset, you will typically be subject to capital gains tax when you sell your second property. Generally, that means you are subject to a tax on the proceeds of the sale that are in excess of your cost basis. However, a number of exceptions to the general rule can make a difference.
One major exception is that if you convert your second home into a primary residence for two of the five years before you sell the home, you may be able to reduce your tax liability. You can only claim the benefit exclusion for one home at a time, however. As always, you should look at your overall position and always consult a tax professional expert before making any decisions.
More than Just a Spot on the Beach or the Slopes
Depending on how you manage your property, you could see it as a rental annuity stream with tax deductions. However, managing properties can also be taxing on your time and energy, so consider working with a professional management company to guarantee income up front and eliminate the burden of finding and managing renters.