New Airbnb IRS rules raise questions.
At one point of time, long back, there was the myth, that the rental properties were the domain of the wealthy persons or wealthy families, and that was the true fact too. At the same time, the hotel rents were at the peaks. So it was difficult for the people to take the rooms for rents.
In order to compensate this high demand and supply, Airbnb was started in 2008. The app allows people to rent from a small bedroom to the large vacation homes at the same time, most of the travelers are looking for the budget friendly place to rest.
Airbnb offers the affordable night’s sleep to everyone and it has no restrictions to become the landlord. The most important thing in such a kind of renting is that, getting a chance to meet different kinds of people, getting a new experience with them and much more interesting factors. But taxes are also considered in this regard of the Airbnb income.
It is important to understand the tax consequences of the renting system. Whether it is a small portion of your home or the full vacation homes, it is not a straight forward process.
Section 240A under the Internal Revenue Code, deals with the houses that are used in personal as well as the rental purposes, it is complicated to deal with the definitions, designations and the upcoming consequences. People who are going to start renting their properties on Airbnb must know the following rules. The rules of section 280A are as follows.
To report the tax implications of renting the home, first thing the renter has to identify whether the property is used in personal, rental or both. And then find out, when the house is used in rental and when it is used in personal purposes.
If the home is used for the rental purposes, then it is rented for the true market value. The market value depends on the number of days the home is being rented. If a person rents his home for the family, and that family pays for using the home for a particular time period, the family uses the home as their primary residence, then it means that, the home is used for the rental purpose.
If these conditions are not met, the days the home is rented for the family is considered as personal use days to the owner of the house.
If you have decided to use the house for the personal purpose in a day, the following people can use the house for the personal purposes on any part of the day.
- First preference is given to the owner of the house.
- Spouses, brothers and sisters, ancestors and the descendants of the owner of the house.
- The person who uses the home under the reciprocal arrangement.
- The person who uses the home for the particular day, other than that day, the home is used for the fair market rental.
If multiple people co-own a property, each of them has the right to use the property for the personal purposes. If any one of those owners has used the home for the personal purposes on any day, it will be treated as everyone has used the home for the personal purposes.
The owners will not be treated as using the home for the personal purposes, if they spent the day for the personal things like, painting, cleaning, repairing and maintaining the house and these days are not counted as neither personal nor rental purposes, the home is treated as it is not used for those days.
Consider, the person A owns the rental house; A rents the house for 10 days to her sister S at Fair Market Value. A also rents the home to the stranger C at FMV for 11 days. At the same time, A plan to live in D’s homes for 6 days. A plan to rent the house for 15 days to F, as a favor. So, altogether A has rented the home for 36 days. All these 36days come under the personal use of the home by A, as per the rules of 280A. And it was treated as, A personally used the house for 36 days and there was 0 days of renting.
Impact of the rental losses
Take a look at the following scenarios to have a better idea about the rental taxes and the rental pricing.
Scenario 1: if the rental use is less than 15 days, then the rental income need not be deducted and exclude the rental income.
Scenario 2: if the rental use is greater than 14 days and the personal use is not greater than 14 days and it does not exceed the 10% of the rental days, then the rental expenses will be deducted in the excess of income.
Scenario 3: if the rental use is greater than 14 days and the personal use is also greater than 14 days and exceeds the 10% of the rental days, then the rental income is recognized and the rental expenses reduces the rental income to zero, but it will not generate a loss.
So, only in scenario 2, the person will experience a loss. And this loss will be useful during tax return.
According to the section 469, the loss generated from a passive activity can only be used to balance the income generated from the passive activity. Passive activity includes all the rental activities without considering how active the taxpayer in conducting the rental activity.
The rental losses will not affect the people who have the passive income that may be either rental income or other income from the activities.
There are three exceptions, but they will help you to benefit from the losses which you have incurred from the scenario 2.
First, if the average customer usage is less than 7 days, then the activity is not considered as the rental activity for the purposes of the passive activity. This can be found by, dividing the average number of customer usage days in the period of the customer usage.
Second, if the person has actively participated in the management of the rental activity, then the activity is considered as rental according to the section 469. The loss up to $25,000 from the rental will be deducted. This $25,000 will be reduced to 50% so that the gross income exceeds $ 100,000. And the benefit will be lost if the gross reaches $150,000.
The active participation standard is a little tougher than the material participation standard. It just requires the participation in the management decisions and ideas or arranging services for others. The decision includes, deciding on the rental terms, approving new tenants approving the repair expenditures and many other similar decisions.
The third one is, if the person is qualified as the real estate professional under 469(c), and if the person establishes himself that, he can materially participate in the rental activities then they will not be treated as passive.
It is clear that, the tax consequences of a part-term rental are not a scary thing. The person can also end up with the tax free cash, disallowed cash or some similar cases and people need not get panic on the tax consequences.