Today I'm going to talk about Airbnbs and how they work,
potentially very different from other long term rentals
and how it could actually potentially be a loophole for you to give you
extra benefits tax wise that you don't get from long term rentals.
So I'm going to cover three important things today.
So I'm going to talk about one, what is deductible?
Two, are they considered
passive and three, are they subject to self-employment tax?
So first, let's talk about what's deductible here.
There's not a lot of changes to long term rentals for the most part.
I mean, your property tax
still deductible, your interest expense is still deductible.
Any management fees, of course, you get depreciation deductions,
although the depreciable life may be a little different if it's an Airbnb.
But the big change is that because you're furnishing an Airbnb
that a lot of times you don't have for a long term non furnished rental.
The big thing here to pay attention to one is that you have a special exemption
which says if you buy personal property and it's 20
$500 or less, you can write it off of that and appreciate it.
So most of the time the couches or the tables, things that you're
putting up in the house or a lot of times or maybe you're buying boardgames
or something like that, all that's considered personal property.
So if each individual item is less than 2500, then you can just write it off
so that is the real difference between an Airbnb
and a long term rental when it comes to deductibility of expenses.
That's the easy part.
Now let's get into the meat of it
and let's talk about whether an Airbnb is considered passive.
This is important because if an activity is considered passive,
it means that it's not deductible unless you have other passive income.
So if you have a loss that you generate, you can only offset
other passive income from other activities.
So generally speaking, you want things to be considered active
so that you're not subject to that limitation.
So that if you have, say, a regular full time job
and then you
also have an Airbnb on the side, if you have losses through depreciation
and other things, or maybe because in the first year
you just spent a lot of money furnishing it,
so you frontloaded those expenses, you want to be able to deduct it.
So it's really important to know whether it's passive or not.
Generally speaking, rental activity
is considered passive by default.
So the real question becomes what is a rental activity?
And we have to look at how the IRS describes the rental activity.
So of course an Airbnb or renting it, but it's a short term rental, right?
So it's not really a question of how we think about it, it's
how the IRS thinks about it.
So the question becomes for Airbnb is one, if it's seven days or less,
it doesn't matter if you're providing services or not.
It's exempt from the definition.
If your average stay is above seven days and less than 30,
then you have to determine whether you provide significant services
and really the determination of significant services
is pretty facts and circumstances based.
So, I mean, basically you're just going above and beyond
and providing certain things to the user that are not required of you.
So of course, you probably should provide heating and cooling rights.
That's not going to be considered a significant personal service.
However, maybe you're providing cleaning every day or changing out towels,
or maybe you're providing like a touring service or something that's
like a package, like a vacation package along with the Airbnb in some way.
So some of those things may or may not be considered
personal services when you take everything into consideration.
But for most, Airbnb is a lot of them.
The average stay is going to be seven days or less.
So you don't really have to consider that.
And then lastly, if you're providing
extraordinary services, it doesn't matter what the stay is.
Of course, this probably isn't going to apply to most Airbnbs
because we're talking here more about like nursing homes, boarding
schools, things like that.
Most of the time Airbnb is are not considered passive
because most of the time the stay is going to be less than seven days
or it's going to be less than 30 days, and they'll be some kind of service
that's provided.
So that's great news because now, unlike most long term rentals,
you can use that loss if you generate one to offset other income.
So this is really a loophole that probably wasn't thought about
because these rules, these passive activity loss rules
came about in the eighties and Airbnb's weren't a thing back then.
So this is a really neat way to take advantage of the tax law
and how it hasn't really been updated for the current environment.
Because if the Treasury knew about this back when they were writing the rules,
they probably would have written them a little different, I don't know.
So lastly, let's talk about self-employment tax
and whether Airbnbs are subject to them, because this could be
a good or a bad thing depending on where you fall.
So generally for long term rentals, you're exempt from self-employment tax,
and self-employment tax is another 15.3% tax
added on to your other income tax.
So it can make a big difference.
So on the Airbnb side, because it's not necessarily considered a rental,
now you have to look at it and see whether it's self-employment income.
So unlike the passive activity loss rules where you're trying to
get out of the norm
and and escape the definition of rental property
when it comes to self-employment tax,
you're now trying to fit into the definition of rental property
and luckily the definition
of a rental activity for self-employment
purposes and passive activity loss purposes are different.
Now they may overlap a little, so we have to be careful,
but technically they're different.
So for self-employment tax, essentially it says rentals are excluded
except for when services are rendered to occupants.
And so what this basically says is if you're not just renting a room,
so if if or a house or whatever it may be,
but instead of you're adding on some other type of service.
So and you have someone to drive a shuttle around
to different vineyards, and that's all packaged with your Airbnb.
And so now you're providing another service.
Well, depending on the extent of those services
that you're providing, then you may now be subject to self-employment tax.
So you have to be careful that you're one.
You're giving people the experience
because that's a big part of what the Airbnb world is about.
But they are not giving so much service
as that now are subject to self-employment tax.
Now it's pretty gray in terms of when you cross that line.
We don't have a lot of examples from the IRS, of course, because this is
all relatively new and they don't release new rules just overnight.
But we did have some guidance.
The problem with the guidance
that the IRS did give us is that it was two extreme examples.
The question is, when do you cross the line?
And what I've seen as most of the time that you're not subject
to self-employment tax course, it is facts and circumstances based.
So the IRS may disagree.
So key takeaways from all of this, what's deductible?
Pretty much the same
as a long term rental, except that you may have a lot more expenses
for furniture and things like that than you can
most of the time just write off right away.
Secondly, that it's probably not considered a passive activity,
especially if the length of stay is seven days or less,
which means you can use losses to offset your other income.
Unlike long term rentals.
And lastly, be careful about how much services
you're providing as part of the Airbnb stay
so that you can avoid paying another 15.3 self-employment tax.