Help understanding Airbnb tax deductions?

Question

I will soon be an Airbnb host and want to get my accounting right from the start. I am buying a house I will live in myself and rent out the different rooms for more than 14 days each year through Airbnb. I am aware of the 14-day rule.

Some of the items / services are 100% deductible like towels and bedsheets for guests. And then apportioning the mortgage interest, insurance, etc.

But there are other scenarios for which I could not find out a definite answer on how to allocate, or no answer at all. I don’t want to cheat the IRS, but don’t want to leave money on the table either.

For example, I might buy a coffee machine, maybe $100. I don’t drink coffee but guests do. I don’t watch TV much either but might buy a TV and subscribe to Netflix. These would be all for the guests, so I could claim 100% of it as a “supply” on Schedule E?

And then there are other repairs, improvements and other items, like a kitchen or bathroom rehab. Say a kitchen repair costs $20K. I estimate that guests “use” the house 40% of the time, so that would mean I could count this a capex of $8K, then depreciate that over a certain number of years?

It all seems kind of arbitrary, but anyway, am I on the right track?

Daniel Hennek · Answer

You should NOT be getting tax advice from an internet forum on your specific tax needs.  You need to stop trying to do it the cheap way and consult with an actual tax adviser such as an attorney or CPA.

Kory Reynolds · Answer

@Paul Winka In a situation like this you can really use any reasonable method that properly reflects how the property is being used.  Keep track of your direct allocations such as the coffee, sheets, towels, etc that you noted, but also track all of the indirect items - utilities, repairs maintenance...it goes on.  Additionally keep track of upfitting and repairs done directly to those bedrooms or other areas of the home that are primarily for use by Air BnB guests - potentially those are 100% deductible / depreciable.  For all of your indirect costs that you also benefit from (electricity, internet, common area work, landscaping, exterior maint, etc) I would pick a reasonable method to allocate the costs - in the case of an Air BnB where you would all have common use of most of the house, potentially by number of bedrooms.  IE you have 1 bedroom of 3, then 1/3 of these indirect costs would be personal in nature, the rest business.

One additional (major) item to keep in mind is that the short term nature of Air BnBs can be more akin to a motel/hotel (ordinary income), and not 'rental' income - ordinary meaning it could be subject to Self Employment tax if you end up showing a profit.  The breaking point is if the average rental is greater than 7 days - then it is 'rental' / passive income.  Seven days or less and you lose that default definition as passive (Treasury Regulation 1.469-1T).  If the average rental is 8-30 days, significant services could make you lose that default definition of a rental / passive - think a hotel (maid service / breakfast / stocked kitchen / use of vehicle etc).  If you are under 7 days and provide no more services than a long term rental (not the case for you, with towels, sheets, coffee, netflix, etc), then you could potentially escape SE tax, but where you are living in the home at the same time it might be a long road to prove you aren't providing some level of service.

Jeannette Ho · Answer

@Kory Reynolds If you are a Real Estate Professional, would time spent operating/managing a short-term Airbnb (average rental less than 7 days) count towards 750 hours of material participation? Or is the short term rental Airbnb not considered real estate activity at that point?

Blake Pedersen · Answer

Hey Paul, I tend to agree with Ashish.  I would share my experience doing taxes one year on my own and then last year with a professional CPA.

First time around, I used turbo tax since it worked for my personal tax situation before. Did some research similar to how I imagine you are. Unfortunately, with my understanding going into tax prep I found turbo tax let me enter some details that I'm sure would be questionable and cause me concern today.  This year, I was able to pay around $400 for the professional. I got answers for all those short term rental specific questions, liability protection to a degree if there was a mistake in the prep, and really sound advice for making documentation decisions for the future filings.

I got lucky being referred by my realtor to a CPA with experience in rental tax prep and keeps up on the latest tax news relating to Airbnb etc.

Ashish Acharya · Answer

Valid concerns. IRS is not going to look at if you shared the Netflix account or drank one cup of coffee.  If they are truly 100% business expense, go ahead and claim it.  It is neither an audit risk nor you cheating IRS. If you ever get audited, you must be able to prove it, but highly unlikely with such low expenses and reason for audit would be something else not you deducting Netflix account. And yes, you can deduct/depreciate the percentage of repair/improvements.  This has been discussed in a lot more detail in other articles or post. Hope you will find them.

Help understanding Airbnb tax deductions?

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