Tax Guide for Short-Term Rentals Stephen Fishman, J.D.
Chapter 1 Introduction: Who This Book is For... 1 Learning Objectives... 1 Introduction... 1 Chapter 2 How Short-Term Rental Hosts are Taxed... 3 Learning Objectives... 3 Introduction... 3 Income Taxes... 3 What Is Rental Income?... 4 What Expenses Are Deductible?... 4 Paying Estimated Tax on Your Rental Profits... 4 Income Taxes When You Sell Your Home... 5 Social Security and Medicare Taxes... 6 What Are Substantial Services?... 6 File IRS Schedule C... 7 Social Security and Medicare Tax Due on Rental Profits... 7 Net Investment Income Tax... 8 What Is the NII Tax?... 8 Who Is Subject to the NII Tax... 8 What Is Net Investment Income?... 8 Amount of the Tax... 8 Real Estate Professionals Not Subject to NII... 8 Hosts in Hotel Business Not Subject to NII... 8 Local and State Occupancy Taxes... 9 Review Questions... 11 Review Answers... 12 Chapter 3 Tax-Free Short-Term Rentals... 13 Learning Objectives... 13 Introduction... 13 Short-Term Rentals That Qualify for Tax-Free Treatment... 13 Dwelling Unit... 13 Used as a Residence... 13 Rentals of 14 Days or Less... 14 Room Rentals... 14 Multiple Properties... 14 Multiple Hosts... 15 Effect of Qualifying for Tax-Free Treatment... 15 No Tax Due on Rental Income... 15 No Deductions for Tax-Free Rentals... 15 Reporting Tax-Free Rental Income on Your Tax Return... 16 Review Questions... 17 Review Answers... 18 Chapter 4 Deducting Your Expenses: The Basics... 19 Learning Objectives... 19 Introduction... 19 What You Can Deduct... 19 Operating Expenses... 19 Repairs and Maintenance... 19 Long-Term Asset Expenses... 20 You Must Allocate Many Expenses Between Your Rental and Nonrental Use... 20 How Your Tax Status Affects Your Deductions... 20 Is Your Rental Activity a Business?... 20 Is Your Rental Activity an Investment?... 21
Is Your Rental Activity Not for Profit?... 21 Deductions for Multiple Owners... 22 Co-Owners Not Married to Each Other... 22 Co-Ownership by Spouses... 23 Ownership Through a Business Entity... 23 Review Questions... 24 Review Answers... 25 Chapter 5 Operating Expenses... 27 Learning Objectives... 27 Introduction... 27 What Are Operating Expenses?... 27 Direct Expenses Deductible in Full... 28 Rental Platform Fees and Commissions... 28 Local and State Licenses and Fees... 28 Advertising and Marketing Expenses... 28 Car and Local Transportation Expenses... 28 How to Deduct Car Expenses... 29 Long Distance Travel Expenses... 29 Home Office Deduction... 31 Hiring Help... 31 Legal and Professional Services... 32 Guest Amenities... 32 Gifts... 32 Entertainment... 32 Other Operating Expenses... 32 Start-Up Expenses... 32 Operating Expenses That Must Be Allocated... 33 Rent... 33 Home Mortgage Interest... 33 Credit Card and Loan Interest... 33 Property Taxes... 34 Utilities... 34 Parking... 34 Insurance... 34 Casualty and Theft Losses... 34 Review Questions... 36 Review Answers... 37 Chapter 6 Repairs... 39 Learning Objectives... 39 Introduction... 39 Repairs vs. Improvements... 39 Deducting Repairs for Short-Term Room Rentals... 39 Three Safe Harbors... 40 Safe Harbor for Small Taxpayers (SHST)... 40 Routine Maintenance Safe Harbor... 42 De Minimis Safe Harbor... 43 Repair Versus Improvement: Analysis Under the Regulations... 43 Betterments... 43 Restorations... 44 Adaptations... 44 How to Deduct Repairs and Maintenance... 44 When Guests Pay for Repairs... 44 Properly Document Repairs... 45 Review Questions... 46 Review Answers... 47 ii
Chapter 7 Deducting Long-Term Assets... 49 Learning Objectives... 49 Introduction... 49 Depreciating Property Used in Your Rental Activity... 49 How to Depreciate Real Property... 50 Determining Your Property s Basis... 50 How Long Is the Depreciation Period?... 51 How Much to Depreciate Each Year... 52 Depreciating Improvements After Rental Activity Begins... 52 When You Sell Your Property... 53 Personal Property... 53 De Minimis Safe Harbor... 54 Materials and Supplies Deduction... 55 Section 179 Expensing... 56 Regular and Bonus Depreciation... 57 Personal Property Converted to Rental Use... 58 Review Questions... 59 Review Answers... 60 Chapter 8 Prorating Your Deductions... 61 Learning Objectives... 61 Introduction... 61 Direct Expenses Are Fully Deductible... 61 Expenses That Must Be Prorated... 61 Renting Your Entire Home... 62 Renting a Room in Your Home... 63 Calculating Personal and Rental Days... 63 Calculating Personal Use... 63 Calculating Rental Use... 64 Putting Your Calculations Together... 65 Review Questions... 66 Review Answers... 67 Chapter 9 Reporting Rental Income on Your Tax Return... 69 Learning Objectives... 69 Introduction... 69 Most Hosts Use Schedule E to Report Rental Income... 69 Schedule E Line-by-Line... 69 Filing IRS Forms 1099 (Lines A and B)... 70 Rental Summary (Lines 21 26)... 73 Completing Schedule E When You Have a Rental Loss... 74 Hosts Who Don t File Schedule E... 78 Hosts Who Provide Guests Substantial Services... 78 Electing Qualified Joint Venture Status... 78 Spouses in Community Property States... 78 Ownership Through a Business Entity... 78 Not-for-Profit Real Property Owners... 79 Tax-Free Home Rentals... 79 Review Questions... 82 Review Answers... 83 Chapter 10 Filing IRS Form 1099 Information Returns... 85 Learning Objectives... 85 Introduction... 85 When Someone Else Reports Your Rental Income to the IRS... 85 Reporting Payments You Make to ICs and Other Workers... 86 Workers Subject to Reporting Requirement... 86 iii
$600 Threshold for Reporting... 86 Exception for Electronic and Credit Card Payments... 86 Filing IRS Form 1099-MISC... 86 Back-Up Withholding for Independent Contractors... 88 Review Questions... 89 Review Answers... 90 Chapter 11 Deducting Losses for Short-Term Rentals... 91 Learning Objectives... 91 Introduction... 91 What Are Rental Losses?... 91 Which Rental Loss Rules Apply... 92 Vacation Home Rules... 92 Limits on Deducting Losses... 93 Undeductible Losses Are Carried Forward... 93 Completing IRS Schedule E... 93 Allocation Strategy to Increase Your Current Deduction... 94 Hotel Business Rules... 95 Rentals for Seven Days or Less... 95 Rentals for 30 Days or Less With Significant Services... 96 Deducting Losses for Hotel Businesses... 96 Suspended Passive Losses... 97 No Personal Deduction for Mortgage Interest... 97 Beware Not-for-Profit Rules... 97 Regular Rental Activity Rules... 97 The $25,000 Offset... 98 Real Estate Professional Exemption... 98 Review Questions... 99 Review Answers... 100 Chapter 12 Record Keeping... 101 Learning Objectives... 101 Introduction... 101 What Records Do You Need?... 101 Separate Rental Bank Account... 101 Separate Credit Card for Rental Activity Expenses... 102 Tracking Income and Expenses... 102 Rental Expenses... 102 Rental Income... 103 Supporting Documents for Your Expenses... 103 Asset Records... 104 Listed Property... 105 Records Required for Local Travel... 105 Records for Long-Distance Travel, Meals, Entertainment, and Gifts... 107 Property Usage Record... 108 Review Questions... 109 Review Answers... 110 Glossary... 111 Index... 113 iv