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How Taxes work on Airbnb

How Taxes work on Airbnb

Anyone with a spare room can make money by letting someone stay in their home for a night or two – and playing host on the platform can prove to be a money-spinner in the long term. You might list your home when you travel, rent out a private room or even operate a second property as a vacation rental on Airbnb.

However, it’s important to remember that running an Airbnb is a business venture, so there are also tax responsibilities that come with renting out your home.

These taxes have tripped up more than a few Airbnb hosts over the years. This article provides the guidance you need to stay in the taxman’s good books. Here’s what you need to know about taxes if you become a host through Airbnb.

Tips for Effectively Calculating Taxes

In order to effectively calculate your taxes and make deductions, you must first do a thorough job of recording your income and expenses. Here are some tips to go about doing just that.

Open a bank account:

Open up a separate bank account for the transactions that revolve around your Airbnb listing. When you have a separate account for your Airbnb business, you will know exactly which expenses pertain to your business and make tracking for tax purposes that much easier.

Use a professional accountant:

An accountant is well informed of local tax laws and will be able to tell you exactly what income and expenses Airbnb hosts should keep a record of. He/she will also be able to guide you on how to deduct any expenses for your rental business including the accountant's fee.

Use an Accounting Software:

If you would rather have software take care of your accounting than a person then invests in good accounting software such as Quickbooks or check out Hostaway’s marketplace for more options. Apart from sorting your expenses by property, most accounting software allow scanning receipts with your smartphone, meaning, no more lost receipts!

Use one payment processing vendor:

If you have listed your property on more than one platform it could be tricky to keep a tab of the income and expenses acquired. Having a single payment processing vendor will centralize all your income transactions that don’t run through Airbnb or other OTAs. It’ll make collecting income data that much easier.

Automate filing income and expenses

Keeping track of income and expenses manually can be a time-consuming process especially if the income comes from multiple sources. As for expenses, you’ll find it time-consuming to organize receipts and invoices. To make it easy to file income and expenses, check out Zapier.

With this software, you can connect almost any two apps together and tell them what to do when something that fits certain parameters happens. For the example of short-term rental income tracking, you can get Zapier to take all Airbnb income statement emails and input it into a Google Sheet or Excel file the minute it comes in.

How To Determine If Your Airbnb Income Is Taxable

Your Airbnb income isn't taxable if you rent out part of your home for only a few days a year. The IRS (or Internal Revenue Service) rule says that you don’t have to pay taxes on income received from rentals if:

  • You rent your home for less than 14 days during the tax year.
  • You use the home yourself 14 days or more during the year, or at least 10% of the total days you rent it to others.

It must be noted however that it also means you cannot deduct any expenses for your rental business. But, you can still take your full mortgage interest and property tax deductions if you itemize.

How does Occupancy Tax Collection and Remittance by Airbnb work?

In areas that Airbnb has made agreements with governments or is required by law to collect and remit local taxes (including but not limited to occupancy taxes, value added taxes (VAT), and good and service taxes (GST) on accommodations) on behalf of hosts, Airbnb calculates these taxes and collects them from guests at the time of booking.

Airbnb automatically collects and pays these taxes on behalf of hosts in certain jurisdictions. However, hosts may need to manually collect occupancy taxes in other jurisdictions. To find out if taxes are being collected in your region check under “Local taxes and laws”. If there isn't a section for local tax collection under Local taxes and laws, Airbnb doesn’t automatically collect and pay on your behalf for that listing.

Can Hosts be Exempted from Paying a Tax?

Yes. If you are not a full-time host and only rent your property for a few days here and there (no more than 14 days in a tax year), you don’t need to report the income on your return. However, this also means you also cannot deduct any expenses for your rental business. But, you can still take your full mortgage interest and property tax deductions if you itemize.

Which Airbnb Expenses are Tax-deductible?

Here are the expenses you can deduct from your activity as an Airbnb host.3 This is a brief overview of these expenses. Some of them may be limited or may not be applicable to your situation.

Note: You must be able to prove that your expenses are both ordinary (typical for Airbnb hosts) and necessary to run your business. This means keeping excellent records in case of a tax audit.

Host expenses

You can claim these expenses at 100% as long as they fully relate to your business:

  1. Marketing and advertising your listing.
  2. Vacation rental software fees.
  3. Commissions and fees are paid to third parties when they help you find renters. This includes Airbnb’s commissions.
  4. Accounting, legal, and other professional fees pertaining to your business.
  5. Repairs to the area used for your Airbnb business (whole-house repairs must be shared)
  6. Other supplies and equipment used in your business such as stationery etc.

Shared expenses

These home-related expenses must be shared between the business and personal portions.

  1. Cleaning services and supplies
  2. Utilities
  3. Insurance on the property
  4. Mortgage interest
  5. Property taxes
  6. Interest on a home loan
  7. Tax preparation expenses

How can Shared Expenses be Calculated?

How can Shared Expenses be Calculated?

Shared expenses are those expenses that must be shared between business and personal portions. Here is how you calculate them on a case-by-case basis.

Case 1: Leonard rents his complete home for 90 days during the year and lives there for 360 days. His total shared expenses are $500.

The percentage that he can claim is (90/360)*100 which is 25% Therefore, he can only charge 25% of $500 which is $125

Case 2: Leonard rents 2 rooms in his house which accounts for 20% of the property for 90 days during the year and lives there for 360 days. His total shared expenses are $500.

The percentage that he can claim based on the days rented is (90/360)*100 which is 25% Which is $125 off the total amount. Based on the percentage of the property he rents he can only charge 20% of $125 which is $25.

In conclusion:

While hosting on Airbnb can be very rewarding there are responsibilities that come with it. One key responsibility that can take you down and out of business if not done right is taxation. The best way to do it is to be meticulous in recording your expenses or just automating the task by using an app.

If you are looking for ways to ease up the load of hosting, then look no further! Find out how Hostaway helps property owners and managers around the world with their software solutions by requesting a free demo.

Ready to find out how Hostaway can transform your business?

Hostaway is proud to support thousands of Property Managers and Airbnb Hosts Around the world. We take pride in being Top Ranked in Vacation Rental Software Review Sites: Capterra, G2, Software Advice, Trust Pilot, to name just a few! Check out our reviews and read the Hostaway Case Studies from real successful and growing Short-Term Rental Managers!