AirBnb Expense Writeoff

[Yue Tian]

Hello, I started my first AirBnb late 2023 and it was rented out for less than 14 days. Based on the 14-day rule, I don't need to file any profit from my short term rental. However, my main expenses (furnishing the property, repair and renovation) happened in 2023. If I did not report expense for my 2023 tax, how would I write off my huge expense (~20K) for my future profit then? Thanks.

[Account Closed]

Hey @Yue Tian, 

Congrats on getting your first airbnb and getting into the game of real estate. I think you maybe missing a few bits of information. In the realm of real estate investments, the short-term rental loophole offers a unique opportunity, subject, however, to certain rules and regulations. According to passive activity loss rules, every business is obligated to adhere to specific criteria, especially when it comes to short-term rentals. One crucial stipulation is that the property must be rented for 7 days or less on average. While this may exempt it from being classified as a rental activity, active participation remains a requirement, necessitating compliance with three tests: spending 500 hours on the property, dedicating at least 100 hours (and more than any other participant), and performing all the necessary work needed.

Additionally, long-term viability and consideration of depreciation recapture are important concerns. Excess business losses are capped for single individuals at $250,000 and for married individuals at $500,000, with any surplus being suspended and carried forward. Notably, short-term rentals are categorized as non-residential properties. If over 50% of guests stay on a transient basis, the property is subject to depreciation over 39 years. Bonus depreciation and Section 179 allowances for improvements can be utilized, with the latter, however, capped at zero to prevent negative losses. Determining whether the venture falls under a service or rental business hinges on the provision of substantial services; for instance, if a bed and breakfast service is offered, it must be reported on Schedule C, triggering a 15.3% self-employment tax.

Moreover, personal use plays a crucial role in the classification of the property. If used for 15 days or more or 10% of the rental days at fair market value, it becomes a residence, subject to specific regulations. The REPS-9 election prohibits grouping short-term and long-term rentals, emphasizing the need for careful strategic planning. Notably, personal visits for maintenance purposes do not contribute to personal use calculations. The involvement of onsite management, often seen as a potential red flag, can lead to the property failing crucial qualification tests. Understanding these rules is essential for investors seeking to capitalize on the short-term rental loophole while maintaining compliance with tax regulations.

[Account Closed]

If you didn't report your expenses for furnishing, repair, and renovation on your 2023 tax return, you may still be able to claim those expenses in the future when you generate rental income from your property.

When you do start earning rental income and need to report it on your tax return, you can deduct eligible expenses associated with renting out your property, including the costs of furnishing, repair, and renovation. These expenses would be reported on Schedule E (Supplemental Income and Loss) of your tax return.

Since you incurred these expenses before you started renting out your property, you can typically depreciate the cost of the furnishings and any improvements made to the property over their useful life. You'll need to determine the depreciation schedule based on the type of property and the IRS guidelines. For example, residential rental property is typically depreciated over 27.5 years.

Keep thorough records of all expenses related to your rental property, including receipts and invoices for furnishing, repairs, and renovations. When you begin reporting rental income on your tax return, you can consult with a tax professional or use tax preparation software to ensure you're correctly claiming all eligible deductions and depreciating the expenses appropriately.

[Basit Siddiqi]

Is this a personal residence that you are airbnbing? If it is, then you are subject to limitations on taking losses as you likely lived in the house for more than 14 days

If this is not a personal residence, the not having to report income for less than 14 days of usage does not apply.