These days, you don't need to be a full-fledged landlord to earn money from rental income. Services like Airbnb, HomeAway, and VRBO make it easy to take in short-term tenants and bank some sweet cash on the side. That said, renting out your home in any capacity could have tax implications, for better and for worse. Here are some things you need to know.
1. You don't have to pay taxes if you limit your rental activity to 14 days or less
While it's true that the IRS generally manages to get a share of your income no matter where it stems from, there's an exception for property owners who limit their rental income to 14 days or less during the calendar year. Essentially, if you stick to that 14-day limit, and also use that same property yourself 14 days or more during the year, or at least 10% of the total days you rent it to others, then whatever rental income you collect is yours free and clear of the IRS's reach. Keep in mind that the 14-day limit applies whether you're renting out your entire property or just a single room in your home.
Now, if you rent out your home through a service like Airbnb, the IRS might get notified of the rental income you receive through it, since these companies tend to report all transactions automatically. If that happens and the IRS questions why you aren't reporting rental income, don't panic. Just be prepared to explain that you stuck to that 14-day limit, and prepare to offer proof of the days your home had a tenant.
2. You can deduct business expenses related to earning rental income
It generally takes money to rent out your home. You might, for example, have to purchase extra guest linens, buy a rollaway bed, or stock the kitchen with extra paper goods for your tenants. If that's the case, know that you're allowed to deduct the cost of these items on your taxes -- but be sure to keep detailed records of these purchases. Guessing at deductions is a good way to get yourself audited, so retain receipts of items purchased in conjunction with paying guests.
3. You can deduct a portion of your home expenses
If you use your home as a source of rental income, you can deduct a number of key expenses that probably cost you a bundle. For example, you're allowed to deduct your mortgage interest, property taxes, and maintenance and repair costs. That said, you can only deduct the portion of those expenses that relates to your rental activity. For example, if you rent out your home 10% of the year, you can deduct 10% of the aforementioned expenses. You can't deduct them in full, since you use your home yourself.
4. You can deduct fees related to renting out your home
Services like Airbnb make it easy to rent out your home, but in return, they take a cut of your proceeds. As such, you're allowed to deduct the fees you pay, since it's not income going into your pocket.
5. You might be required to pay taxes during the year
When you rent out your home during the year, you're not just required to report that income; you're also required to pay taxes on it, assuming you exceed the 14-day mark. Just like freelance and self-employed folks pay estimated quarterly taxes on their income, so too should you be paying the IRS its share of your earnings from renting your property as you go along.
Additionally, some states require people who rent out their homes on a short-term basis to collect and remit sales and occupancy taxes. Depending on where you live and the service you use to rent out your home, that might get taken care of for you (for example, Airbnb collects these taxes when the situation warrants it), but do some research if this isn't the case to make sure you're not dropping the ball.
Renting out your home is a great way to generate extra income. Just be aware of the tax implications involved, and aim to maximize the benefits available to you.