United States: Tax Implications of the Sharing Economy - Special Rules for Home Rentals

If you use online platforms to rent a spare bedroom, lawnmower, car or bicycle; or to provide car rides or dog walks; or to connect and deliver other goods or services, you are involved in what is sometimes called the sharing economy.

With an explosion of technological advances and a trend toward a sharing economy, the way the average consumer transacts business on a day-to-day basis is forever evolving. Airbnb, as well as companies like Uber and Lyft, have changed the way we travel, while services such as Letgo and Poshmark, following in the footsteps of pioneers like eBay, have transformed the manner in which we buy, sell and share products. You can even rent out the family minivan for a day with apps like Turo. 

Perhaps the biggest winners of the sharing economy revolution are short-term vacation rental services such as Airbnb, HomeAway and VRBO (Vacation Rentals by Owner). With these services, individuals rent out their homes, or individual rooms within their homes, to travelers and vacationers. These services provide what is essentially a win-win for each party involved: Renters get an opportunity to vacation "like a local" and homeowners get a chance to make some extra money.

While the simplicity and value of these services may be appealing, homeowners renting their properties, in particular, should plan for an additional, and frequently unexpected, houseguest: Uncle Sam. Homeowners utilizing short-term vacation rental administrative services are often unaware that there are tax implications involved in the renting of their personal or vacation home. The IRS has recently launched a sharing economy resource center specifically dedicated to providing assistance to taxpayers in identifying resources needed to help them in meeting their tax reporting responsibilities. Now, more than ever, it is imperative to follow tax reporting rules, as we believe the IRS will start target examinations of tax returns reporting this type of activity.

Below are some guidelines for individuals who may be looking to rent out their property through Airbnb or other similar online platforms.

General Rental Rules

In general, income received from the rental of real property (i.e., real estate) is taxable. Taxpayers are also generally entitled to report appropriate expenses, which are used to offset the income received in a given tax year. Common expenses include mortgage interest, real estate taxes, repairs and maintenance, depreciation and utilities.

Rental of Residences and Vacation Homes

Most taxpayers, especially those utilizing services such as Airbnb and VRBO, are not renting out a property that is strictly used for rental purposes, but rather are renting out their personal residence or a vacation home. Rental properties, for tax reporting purposes, generally fall into three categories:

  • Personal Residence with Very Limited Rental Use: This is a residence that is rented for fewer than 15 days during the year. In order to qualify as a residence, the property must be used for personal purposes for more than the greater of 14 days or 10 percent of the rental days during the year. If the property qualifies as a residence and is rented for fewer than 15 days during the year, you are not required to report the rental income. Similarly, the expenses, other than qualified mortgage interest, property taxes and any qualified casualty loss, are not reportable. Otherwise known as the "15-day exception," this rule is extremely beneficial for those looking to rent out their home, or a portion thereof, through Airbnb and similar platforms for a week or two during the year.
  • Vacation Home with Both Rental and Personal Use: This is a property with (a) personal use that exceeds the greater of 14 days or 10 percent of the rental days and (b) rental use that exceeds 14 days. In accordance with IRS rules, income from these properties must be reported on the taxpayer's income tax return and allowable expenses are prorated based on the ratio of the rental use of the property to the total days used during the year. Courts, however, may use the "number of days in the year" rather than "days used during the year." For those participating in the sharing economy, IRS rules may yield greater tax deductions.
  • Rental Property with Very Limited Personal Use: This is a property that is rented during the year in which personal use does not exceed the greater of 14 days or 10 percent of the rental days. Income from these properties are also required to be reported on the taxpayer's income tax return, with allowable expenses prorated to remove the portion attributable to personal use.

Conclusion

While the sharing economy continues to gain prevalence in the United States, it has also caught the ever-watchful eye of the IRS. With increasing IRS focus, taxpayers should be very diligent in their compliance with such rules and regulations.

There are two primary tips that taxpayers should consider when renting out properties through a short-term vacation rental service. First, and most importantly, is recordkeeping. It is imperative that landlords maintain clear and supportive records, including the maintenance of receipts, for all income and expense items incurred and/or paid during the year. Second, individuals should maintain a log in order to track rental and personal use days associated with any property. This is particularly critical for those who utilize Airbnb or similar platforms for a few weekends or a week during the year and wish to qualify for the "15-day exception."

In addition to federal and state income tax considerations, some jurisdictions impose occupancy taxes based on gross revenue. To complicate matters further, tax rates and methodologies differ by locality. Vacation homes are often located in a jurisdiction other than the taxpayer's home state or locality, and rental income generated in those jurisdictions may trigger additional tax filing responsibilities.

For Further Information

If you would like more information about this topic or your own unique situation, please contact Kevin F. Ward, CPA, CSEP, or any of the practitioners in the Tax Accounting Group.

For Further Information

If you would like more information about this topic or your own unique situation, please contact Kevin F. Ward, CPA, CSEP, or any of the practitioners in the Tax Accounting Group.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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