More on Short-Term Rentals: Further Details on Sharing Economy's Tax Implications

By D'Avolio, Mike | Journal of Accountancy, April 2017 | Go to article overview

More on Short-Term Rentals: Further Details on Sharing Economy's Tax Implications


D'Avolio, Mike, Journal of Accountancy


In December, the column "Tax Practice Corner: Short-Term Rentals, the Sharing Economy, and Tax" {JofA, Dec. 2016, tinyurl.com/hode8nk) covered the income tax implications for CPAs' tax clients who rent out their properties on a short-term basis such as through Airbnb and other "sharing economy" accommodations, including what income is taxable, which deductions are allowable, and how to report the activity on the tax return. Following are some frequently asked questions covering more points related to this topic, some of them raised by readers in response to the earlier column.

Are short-term rentals (less than 30 days) subject to state and local sales taxes and hotel occupancy taxes?

Short-term rentals are generally subject to state and local sales taxes where applicable, and the rules within a given state or locality for hotel occupancy taxes can vary. Hosts need to check the rules within their state or locality to find out for sure whether either or both of these types of taxes apply.

Should taxable rental activity be reported on a Schedule C, Profit or Loss From Business, or other business return when substantial services are involved?

In general, taxpayers who rent buildings, rooms, or apartments and provide basic services, such as heat, light, trash collection, and cleaning of public areas report their rental income and expenses on Schedule E, Supplemental Income and Loss, Part I, of Form 1040, U.S. Individual Income Tax Return.

On the other hand, Schedule C is used when hosts provide substantial services in connection with the property or the rental is part of a trade or business as a real estate dealer. Substantial services that are primarily for a tenant's convenience include regular cleaning, changing linen, or maid service.

If an entire dwelling unit is used for personal purposes for part of the year and rented out for part of the year, how should deductions be apportioned between personal and rental use of the dwelling?

If there is any personal use of a dwelling unit or vacation home that taxpayers rent out, they must separate expenses for rental use versus personal use. Generally, if the entire unit or home is being rented, the portion of the total expenses treated as rental expenses is determined by multiplying the total expenses by a fraction, with the denominator being the number of days the dwelling unit is used during the year and the numerator being the total number of days it is rented at fair value. Allowable rental expenses are deducted on Schedule E or C, and allowable personal expenses are deducted on Schedule A, Itemized Deductions, if the taxpayer itemizes (e.g., mortgage interest).

Often, the homeowner is sharing the home with an unrelated tenant or is renting out a room in an occupied residence. How do owners deal with this situation? …

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