Have you joined Airbnb or found some other way to make money renting your personal residence?
If so, there are some tax rules that could save you a bundle. Here’s what you need to know.
The 14-day rule
Arguably the most important tax rule for landlords is the 14-day rule. It has two parts.
First, for a house to be considered your personal residence, you have to live in it for at least 14 days—or more than 10% of the time that it’s rented to other—whichever is more.
Thus, if you rented your house out for a month, you’d have to live in it for just 14 days for it to be considered your residence. However, if you rented it out for six months, 180 days, you would need to live in it for at least 19 days for it to qualify.
Why does it matter? Because a bunch of other rules provide special tax breaks for people using their personal residence as a rental, including the other part of the 14-day rule. That is: If you rent your house for 14 days or less each year, you don’t have to claim the income on your income tax return.
Yep. 14-days of rental income—if you don’t rent the property for a single day more—is free from all federal income taxes. And, in states that conform with federal tax rules, it’s generally free from state income taxes as well.
Of course, you would also then not be able to write off rental expenses. But assuming your expenses are less than your rental income, which is usually going to be the case, this is a great deal.
So let’s say you have an expansive home that you can rent through Airbnb for $1,000 a night. If you were able to secure a 14-day rental, that would generate $14,000 in rental income. After paying 3% to Airbnb, you take home $13,580—tax-free.
If you rent your house for additional days, you may make more before tax. However, what matters is whether you’d make more after tax.
To quickly estimate the tax bill on, say, a 16 day rental, multiply the income you’d receive (after the 3% Airbnb fee) by your tax rate.
Mostly likely, if you are in a high tax bracket, you’ll need to rent it considerably more—probably 20-30 days—to come out ahead on the tax-free 14 days.
However, if you have significant rental expenses that are not covered by tenants or are in a lower tax bracket, you might want to consult a tax advisor to determine your best course of action.
The 14-day rule: The twists
There are some nuances to the 14-day rule worth keeping in mind.
For the purposes of rental rules, you can have a lot of residences. Any home that you live in for more than 14 days during the year qualifies, says Mark Luscombe, principal tax analyst with Wolters Kluwer.
That means that if you rent it out for less than 14 days, the rent is tax exempt from each and every property that you can consider a personal residence.
If you rent out a house that you don’t live in for at least that 14 days, every penny you receive in rent is taxable.
Also, keep in mind that the 14-day rule applies no matter the purpose of your residential rental. So if you rent your personal residence for special events and movie sets through sites like Giggster, Splacer, PeerSpace and ThisOpenSpace, you still get to rent tax-free for that 14 days.
And since these sites rent your home by the hour at rates that can amount to 10-times what you could get for a night’s rental with Airbnb (or any of the several dozen other sites that will help you rent your home, or spare rooms, to travelers), that could add to a lot of income.
If you have a guest house or vacation home that’s in hot demand, you’re naturally going to want to forget all about the 14-day rule because the income you can earn from a popular rental is a lot more important than the tax.
However, you’ll want to keep close track of all of the expenses related to the rental. You only pay income taxes on your net income—that is, income after expenses are deducted.
What’s deductible? Almost anything that’s reasonable and necessary to generate income from your rental. For instance, if you buy snacks, coffee, beach chairs, bedding, etc. for your renters, you can deduct the cost of these purchases in the year they’re incurred against your rental income.
You can even deduct some home improvements, furniture, utility costs, insurance, and maintenance expenses.
Just keep in mind that if you’re only renting out a room in your home, you’re only allowed to deduct the so-called business portion of your bills.
How do you calculate the business portion? Generally speaking, you would figure out what percentage of your home was set aside for renters. So, if you have a 1,000 square-foot residence and the bedroom and bath that’s exclusively used by renters is 250 feet, you could reasonably deduct 25% of these bills as rental costs.