By James J. Newhard, CPA, CGMA

While not many people think about this, most of your home costs that you pay continue whether you are there or not. But some people are finding ways for their homes to generate offsetting income flows. You can make your home work for you when you are away on vacation or traveling on business. More and more people are signing up to be on the “host” list so as to provide the extra source of income that can arise from renting out your home (or apartment, a room, or suite of rooms) through services such as Airbnb, HomeAway, or VRBO. If you choose this path, keep in mind that what you receive may have tax consequences. Companies like Airbnb will issue a 1099-MISC for the rental income to the hosts. But rental scenarios can be complex. Let’s review some of those complexities.

The Days Matter

A taxpayer who rents out his or her house or apartment for 14 days or less annually, and uses the home personally for more than 14 days (or more than 10 percent of the total days rented to others at fair rental price) essentially have nonreportable rental income! The trade-off for no reportable income is that no expenses are claimable.

With the 15th rental day (and beyond), everything moves into the reportable world of a schedule E and tax return reporting. Expenses will be limited to rental income with a corresponding loss carryforward. Direct rental expenses have limitations, especially if only a portion or room of the home is rented out, along with the proportionate pro-rata portion of common expenses. At this point, you may need the professional guidance of a CPA. Airbnb charges fees for this service (generally 3 percent), and hosts may need to look carefully at their home insurance coverage, though Airbnb does provide Host Guarantee protection.

One additional caution – a homeowner must be aware that cities have laws that restrict your ability to host paying guests for short periods.

Are You a B&B?

Another twist could present itself if all or part of a house or apartment is rented out as a bed and breakfast, a treatment akin to running a hotel. One trigger for this is when a room or rooms are never used personally and always available for paying guests. If B&B treatment is triggered, you will need to report the income on schedule C (as an active business and subject to self-employment tax) rather than schedule E. You could avoid this tax treatment by not providing substantial services to the guests, by not providing the guests breakfast, by not cleaning their rooms each day, and by not providing laundry services. Then, charge the renters a cleaning fee, invoiced separately from the rental charges.

While renting out your unused home or rooms to generate revenue might be a little less complicated than flipping houses or day trading, a tax and financial plan is necessary. Your eyes should be wide open and your expectations clear.

James J. Newhard, CPA, CGMA is the owner of James J. Newhard, CPA, and services small businesses/entrepreneurs, individuals, nonprofit organizations, and estates/trusts. He is Greater Philadelphia Chapter past-president and recipient of the Volunteer Service Award and the Champion Service Awards. He serves on several PICPA committees at the state level, and is a member of the American Institute of CPAs.