Big events bring big money to host cities. Free-spending visitors flock to the sites of Super Bowls, art and music festivals and, every four years, presidential inaugurations.
But it’s not just municipal treasuries that benefit. Residents who flee to avoid the hoopla can charge prime rates for a few days in their homes. For example, attendees of President-elect Donald Trump’s inauguration events could choose from more than 300 listings on Airbnb this week, averaging around $700 per night.
Even better, Airbnb hosts and other short-term landlords might not owe the IRS a cent. The federal tax code carves out an exclusion for profits from homes leased for two weeks or less. Here’s how it works.
Short-term rental rules
To take advantage of the tax exclusion, the property you’re renting out must be your primary residence, the one where you live during the tax year.
The 14 days of tax-free rental income is also available on a vacation property as long as you or a family member stay in it for at least 14 days during the same year or for at least 10% of the days you rent it, whichever is greater. Because you’re aiming for the tax-free rental income, this means you need to also stay in your mountain cabin or lake house yourself for two or more weeks.
Thinking of leasing only your spare bedroom during the celebration? That gets a tax-free OK from the IRS, too, as long as you rent the space for no more than two weeks.
The 14-day limit applies to the whole tax year, not each time you rent your home. A couple of weeklong events will get you to the limit quickly.
You need to ask and receive a fair price for your home’s rent. The IRS defines this as the amount of rent that an unrelated person would be willing to pay. Of course, fair is fluid when it comes to scarce space and major events.
Because you receive the short-term rent tax-free, you aren’t allowed to deduct related expenses, such as cleaning supplies to ready the property for visitors.
Keep close track of the days you lease your home. If you hit rental day 15, you must include all of your rental income when you file your taxes, not just the amount collected after the 14-day free period. And because you used the dwelling unit for personal purposes, you must divide your expenses between rental use and personal use. This means more record-keeping.
You’ll also have to determine which tax form to use. When you rent all or part of your main home or vacation home for 15 or more days per year, you normally report the income on Schedule E, Supplemental Income and Loss. That’s also where you can write off allowable expenses.
If, however, you provide substantial services to your guests, such as meals or cleaning the property during their stay, the IRS tends to view the rental as a business activity. In this case, you’ll report the taxable rent on Schedule C, Profit or Loss From Business, or Schedule C-EZ, Net Profit From Business. And you’ll probably owe self-employment tax. This additional 15.3% tax goes toward Medicare and Social Security. It’s required when you have business income of $400 or more.
If you rent your residence or a second home for substantial periods during the year, it’s a good idea to talk with a tax professional, especially one who specializes in rental properties. The amount you’ll save by submitting correct taxes will likely offset the price of the advice.
Watch out for local fees
Even if you don’t have to pay federal income tax on your rental earnings, you might be subject to local fees. Some states, cities and counties categorize home rentals like hotels and impose lodging occupancy taxes across the board.
The types of taxes and rates vary by jurisdiction, so ask local officials about your tax responsibilities when renting your home.