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Airbnb Income Tax Reporting and Deductions

Airbnb Active vs. Passive Involvement

One of the classifications the IRS makes when it looks at how you earned your income is "passive" or "active". Active income implies you materially participated in the production of your income. Passive income implies you didn't materially participate in the production of your income. You may be wondering why does this matter? Well, if you are engaged in rental activities determining if your rental income is passive or active will have an implication on what IRS schedules you file, what taxes you are subject to, and how much loss you are able to deduct. Take a look at our diagram to better understand this concept.

AIRBNB HOST

Roger rents a room in his house on Airbnb for for an average of 3 days per reservation. He is an attentive host but he does not provide any substantial services to his guests. Rodger's activity would be considered rental, and he would report his rental activities on Schedule E. Since Rodger rents his property on a short-term basis, his rental losses on Schedule E cannot exceed his rental income.

AIRBNB HOST

Kelly rents a room in her house on Airbnb for an average of 3 days per reservation. During her guests' stay, Kelly provides regular maid service and cooks all of their meals. Kelly's activity would be considered business and she would report her activities on Schedule C. Since Kelly is deemed to be operating a business, rather than a rental, Kelly would not be subject to passive loss rules but she would have to pay 15.3% self employment tax on her business income.

LANDLORD

Pat owns a second home that he rents on an annual lease to a long-term tenant. Pat makes repair and maintenance decisions, drafts rental terms, finds and approves his tenants, and overall is very involved in managing his property. Pat's activity would be considered rental, and he would report his rental activities on Schedule E. Since he rents his property on a long-term basis and is actively involved, he can deduct up to $25,000 of rental losses on Schedule E.

LANDLORD

Jack owns a second home that he rents on an annual lease to a long-term tenant. Jack is a busy guy so he has an agent and a management company handle the majority of the decision making for his rental property. Since Jack would not be considered actively involved, he would only be able to deduct his rental expenses to the extent he has rental income on his Schedule E.

REAL ESTATE AGENT

Karen is a real estate agent who has a second home that she rents through Airbnb for an average of 2 days per reservation. Karen is very active in managing her rental and makes all decisions regarding the property. Further, she is spends at least 100 hours during the year managing her short-term rental, and nobody works more than her. Since Karen is a real estate professional and meets one of the requirements for material participation, she is eligible to deduct up to $25,000 of losses from her rental property, regardless of how much income or lack thereof her property generates.

How Hurdlr helps Airbnb Hosts with tax deductions

MORE INFORMATION FOR AIRBNB HOSTS

If you rent rooms or apartments and provide basic services, you would normally report your rental income and expenses on Schedule E, which means you will be required to determine if you are subject to Passive Activity Loss Rules. Passive involvement occurs when you rent a real estate property, but you are not actively involved in the operation of management of it. Generally, rental property owners who leave substantially all decision making to a management company or real estate agent would be considered passively involved. Losses from passively managed rental properties are limited to passive income. In other words, your rental deductions cannot exceed your rental income.
If you rent your property on a short-term basis (average period of customer use is seven days or less, or the average period of customer use is 30 days or less and significant personal services are are provided), your participation will be considered passive regardless of whether you materially participate in managing your property, unless you are a real estate professional. If you are a real estate professional your short-term rentals can qualify for active participation ($25,000 loss limitation) if you materially participate in managing the property. Refer to the links below for additional details.
If you rent on a long-term basis and you materially participate in managing your rental property, including but not limited to making repairs and maintenance decisions, drafting rental terms, approving tenants, etc. you could be considered actively involved. If you are considered actively involved in managing your rental, your losses can total $25,000 regardless of how much income or lack there of your property generates.
If you rent rooms or apartments and provide substantial services (maid service, regular cleaning, cooking, etc.), as a hotel or Bed and Breakfast would, you will be considered a business instead of a rental and you should report your rental income and expenses on Schedule C. Schedule C / business filers are not subject to any passive loss rules. While this may be favorable from a deduction perspective, Schedule C filers are subject to 15.3% self employment tax, while Schedule E filers are not.
Active vs. passive involvement is a complex topic. Your tax preparer will be able to clarify distinctions for you specifically.

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