Post by High Priestess on Nov 11, 2015 3:04:48 GMT
Here is a useful article on taxes and your Airbnb rental:
www.forbes.com/sites/anthonynitti/2015/11/09/renting-your-home-on-airbnb-be-aware-of-the-tax-consequences/
Some excerpts from the article:
"Personal versus Rental Use
In order to properly report the tax implications of renting your home, you must determine if it is a “rental” or a “residence” — or both. The first step towards accomplishing that, however, is to identify when the home is used for “rental purposes” versus when it is used for “personal purposes.”
In general, a home is treated as being used for rental purposes for any day it is rented for fair market value. However, if you rent your home to a family member, those days will only be treated as rental days if the family member pays fair market value for the use of the property and the home is used by the family member as his or her primary residence. If these two requirements are not met, the days the home is rented by the family member are considered “personal use” days to the owner."
"Based on the previous discussion, one thing should quickly become clear: if you use Airbnb to rent out a room in your principal residence while you continue to reside there, you will be attributed a personal use day for every day of the year, even the days the home was rented."
Scenario 3: Rental Days Exceed 14 Days, and Your Personal Use Days Exceed the Greater Of 1) 14 days, or 2) 10% of Total Rental Days
This is where things get interesting. If you rent a home for more than 14 days, and you also use the home for personal purposes for more than the greater of 14 days or 10% of rental days, the home is once again deemed to be a residence. Because the home is a residence, and not a rental, just as in Scenario 1, no rental loss is permitted (though under Section 280A(c)(5), any excess loss can be carried forward) Unlike Scenario 1, however, the rental income must be recognized and reported; it’s just that the rental expenses attributable to the rental can only reduce the income to zero.
Here’s where tax planning can become important. As a reminder, there is a distinct order in which rental expenses must be deducted against rental income: first mortgage interest and real estate taxes, then operating expenses, and then lastly, depreciation expense. And while the IRS maintains that all three categories should be allocated between rental and personal use based on the total number of days the home was rented and used for personal purposes during the year — with no consideration given to days the home sits open — the Tax Court has a different view.
In the 1982 Tax Court case Bolton v. Commissioner, the court permitted the taxpayer to allocate Category 1 expenses — mortgage interest and real estate taxes – to rental use by using the full 365 days in the year, even if the home was not used for either rental or personal purposes for some of these days. This results in a lower allocation of mortgage interest and real estate taxes to the rental activity.
Now, why would anyone want that? Wouldn’t you want to allocate MORE of your expenses to the rental activity to offset the income?
Remember, because the house is now a residence under Section 280A, any mortgage interest — and of course, any real estate taxes – not allocated to the rental activity will be deductible on Schedule A as an itemized deduction (provided the mortgage debt limitation is not exceeded and the residence is not your third home). As a result, if you can allocate less mortgage interest and taxes to the rental activity, the remainder will be deducted elsewhere, and it frees up more of the other two categories of expenses to be deducted against rental income before the income is zeroed out. You have thus increased your total deductions on your tax return.
Example: A owns a vacation home. During 2015, the home was rented for 91 days at FMV for $2,700. During the year, A also used the home for personal purposes for 30 days. The vacation home was vacant for the other 244 days. During 2015, A incurrent the following expenses:
mortgage interest: $2,854
property taxes: $621
operating expenses: $2,693
depreciation deductions: $3,500.
Under the method prescribed under Section 280A(e), the IRS would allocate all expenses 75% to rental use (91/121) and 25% to personal use. By contrast, if A can use the Bolton method to allocate the mortgage interest and real estate taxes, A would allocate only 25% of mortgage interest and real estate taxes to rental use (91/365) and would allocate the remaining expenses 75% to rental as required by Section 280A(e). Look how different the tax consequences would be in the two scenarios:
IRS Bolton
Rental Income $2,700 $2,700
Less: Category 1 expenses
mortgage interest ($2,854) ($2,140) ($713)
real estate taxes ($621) ($466) ($155)
Remaining income after Category 1 expenses: $94 $1,832
Less: Category 2 expenses
operating expenses ($94) ($1,832)
Net Income $0 $0
In both scenarios, the net rental income is zero, as it should be. Remember, because the house is a residence (due to the personal use), no rental loss can be recognized. The difference, however, is that under the Service’s method, only $714 of mortgage interest and $155 of real estate taxes are allocated to the personal use of the home and may be deducted on Schedule A. Using the Bolton method, however, $2,140 of mortgage interest and $466 of real estate taxes are allocated to the personal use of the home and may be deducted on Schedule A. As a result, by using the Bolton method, A is able to deduct an additional $1,737 of interest and taxes. If that doesn’t sound like much, tack a zero onto all of the numbers in our example, and the Bolton method becomes very advantageous.
www.forbes.com/sites/anthonynitti/2015/11/09/renting-your-home-on-airbnb-be-aware-of-the-tax-consequences/
Some excerpts from the article:
"Personal versus Rental Use
In order to properly report the tax implications of renting your home, you must determine if it is a “rental” or a “residence” — or both. The first step towards accomplishing that, however, is to identify when the home is used for “rental purposes” versus when it is used for “personal purposes.”
In general, a home is treated as being used for rental purposes for any day it is rented for fair market value. However, if you rent your home to a family member, those days will only be treated as rental days if the family member pays fair market value for the use of the property and the home is used by the family member as his or her primary residence. If these two requirements are not met, the days the home is rented by the family member are considered “personal use” days to the owner."
"Based on the previous discussion, one thing should quickly become clear: if you use Airbnb to rent out a room in your principal residence while you continue to reside there, you will be attributed a personal use day for every day of the year, even the days the home was rented."
Scenario 3: Rental Days Exceed 14 Days, and Your Personal Use Days Exceed the Greater Of 1) 14 days, or 2) 10% of Total Rental Days
This is where things get interesting. If you rent a home for more than 14 days, and you also use the home for personal purposes for more than the greater of 14 days or 10% of rental days, the home is once again deemed to be a residence. Because the home is a residence, and not a rental, just as in Scenario 1, no rental loss is permitted (though under Section 280A(c)(5), any excess loss can be carried forward) Unlike Scenario 1, however, the rental income must be recognized and reported; it’s just that the rental expenses attributable to the rental can only reduce the income to zero.
Here’s where tax planning can become important. As a reminder, there is a distinct order in which rental expenses must be deducted against rental income: first mortgage interest and real estate taxes, then operating expenses, and then lastly, depreciation expense. And while the IRS maintains that all three categories should be allocated between rental and personal use based on the total number of days the home was rented and used for personal purposes during the year — with no consideration given to days the home sits open — the Tax Court has a different view.
In the 1982 Tax Court case Bolton v. Commissioner, the court permitted the taxpayer to allocate Category 1 expenses — mortgage interest and real estate taxes – to rental use by using the full 365 days in the year, even if the home was not used for either rental or personal purposes for some of these days. This results in a lower allocation of mortgage interest and real estate taxes to the rental activity.
Now, why would anyone want that? Wouldn’t you want to allocate MORE of your expenses to the rental activity to offset the income?
Remember, because the house is now a residence under Section 280A, any mortgage interest — and of course, any real estate taxes – not allocated to the rental activity will be deductible on Schedule A as an itemized deduction (provided the mortgage debt limitation is not exceeded and the residence is not your third home). As a result, if you can allocate less mortgage interest and taxes to the rental activity, the remainder will be deducted elsewhere, and it frees up more of the other two categories of expenses to be deducted against rental income before the income is zeroed out. You have thus increased your total deductions on your tax return.
Example: A owns a vacation home. During 2015, the home was rented for 91 days at FMV for $2,700. During the year, A also used the home for personal purposes for 30 days. The vacation home was vacant for the other 244 days. During 2015, A incurrent the following expenses:
mortgage interest: $2,854
property taxes: $621
operating expenses: $2,693
depreciation deductions: $3,500.
Under the method prescribed under Section 280A(e), the IRS would allocate all expenses 75% to rental use (91/121) and 25% to personal use. By contrast, if A can use the Bolton method to allocate the mortgage interest and real estate taxes, A would allocate only 25% of mortgage interest and real estate taxes to rental use (91/365) and would allocate the remaining expenses 75% to rental as required by Section 280A(e). Look how different the tax consequences would be in the two scenarios:
IRS Bolton
Rental Income $2,700 $2,700
Less: Category 1 expenses
mortgage interest ($2,854) ($2,140) ($713)
real estate taxes ($621) ($466) ($155)
Remaining income after Category 1 expenses: $94 $1,832
Less: Category 2 expenses
operating expenses ($94) ($1,832)
Net Income $0 $0
In both scenarios, the net rental income is zero, as it should be. Remember, because the house is a residence (due to the personal use), no rental loss can be recognized. The difference, however, is that under the Service’s method, only $714 of mortgage interest and $155 of real estate taxes are allocated to the personal use of the home and may be deducted on Schedule A. Using the Bolton method, however, $2,140 of mortgage interest and $466 of real estate taxes are allocated to the personal use of the home and may be deducted on Schedule A. As a result, by using the Bolton method, A is able to deduct an additional $1,737 of interest and taxes. If that doesn’t sound like much, tack a zero onto all of the numbers in our example, and the Bolton method becomes very advantageous.