Tax Consequences For Section 280A and Airbnb Vacation Rental Assets | Asset Protection for Real Estate Investors : Royal Legal Solutions

Tax Consequences For Section 280A and Airbnb Vacation Rental Assets

Do you have properties you’re using as vacation rentals, short-term, or mid-term rentals? If so, or if you are considering listing part or all of an investment property on Airbnb or any other online platform, this article is for you. Vacation rentals have become an increasingly popular way to maximize profits on investment properties. That said,  to run your vacation rental business legitimately, you need to be certain to cross your “t”s and dot your “i”s. Because this type of use is a fairly new byproduct of the gig economy, regulations and laws can change quickly. Even the insurance industry has caught up at this point. So of course the Tax Man has. The smart investor must be mindful of not only their state and local legislation, but also how these types of investment properties are taxed. Here’s our little crash course on the subject to get you started.

What Type of Airbnb Host Are You?

Of all the questions that will help determine your tax responsibilities vis a vis Airbnb profits, this is both the most qualitative yet critical. Your answer is the difference between “not a penny owed” and “Get out your checkbook.”

Depending on which of these two criteria you fall into, you may not have to report at all:

  1. Your home is only on the Airbnb platform for 14 days or fewer of the calendar year. Pocket your funds and enjoy the thrill of beating the system. No reporting necessary.
  2. Those who rent their home over 15 days out of the year–including spare rooms, part of the home, etc.–will have to report any income derived from such rental on Schedule E of their tax return.  

Section 280A is the part of the Tax Code that makes these definitions for personal and rental use and otherwise lays out the rules investors must play by. Fortunately, it isn’t all bad news though. Here’s a quick breakdown.

What is Section 280A? Does it Matter to Me?

Section 280A of the Internal Revenue Code isn’t just a novel way to kill conversation during date night–it’s the Taxman’s guidebook for how you get to use your home in the course of business. In fact, Section 280A has made a cameo right here on the RLS blog before in our breakdown of the Home Office Exemption (a worthy read if we may say so ourselves).

If you’re renting your home or any piece of it for profit for fifteen or more days annually, then Section 280A matters to you. This is the portion of the Tax Code that will dictate what must be reported, which records matter, and perhaps most importantly for lots of you, which deductions you can take on your short term rental real estate business. If you’re considering entering this market, it’s wise to become hip in the ways of managing your records and taxes. You’ll find yourself coming back to 280A in some form or fashion a few times before Tax Season is over.

Get in the Habit: Accurately Report AirBnb Income and Expenses

Regardless of how long you plan to be in the vacation rental game, one area you cannot get sloppy on is bookkeeping. Now don’t worry, there are no new fancy systems to learn here. You’re free to self-organize to your heart’s content. Here’s what the Tax Man cares about if you’re hosting over fourteen days out of the year:

  • Income records–either supplied by or matching those belonging to your platform.
  • Major expenditures and platform fees.
  • Any record of an expense you may later take as a tax deduction

Now, Airbnb might report your earnings. They have to, beyond a certain point. Airbnb users with over 200 individual transactions or earning in excess of $20,000 within a year can expect Airbnb to report these figures. This is yet another good reason to always start with the records you have on the platform itself, but keep your own for accuracy reasons. You may be one of the many users that falls somewhere in between “occasional” and “frequent.” Whatever your situation, keeping your own records guarantees you’ll have at least one full set of documentation.

What Deductions Can I Take as an Airbnb Host?

Fortunately, there are tax benefits as well as obligations that you may enjoy related to your vacation rental business. This is why documenting expenses can be so critical to maximizing your tax savings on these properties.

You probably already know there’s a bit of overhead to hosting, and in some areas, quite a lot. That’s why these types of expenses are generally deductible on your taxes:

  • Rental expenses
  • Cleaning and maintenance costs
  • Depreciation
  • Advertising and marketing expenses
  • Background and credit checks
  • Damages, if applicable
  • Rental upkeep
  • And more.

Basically, if it’s a real and justifiable business expense, you can likely use it as a deduction too. If there’s some unique cost related to your property, make a note of that. It never hurts to ask your CPA about costs like specialty insurance or anything you explore explicitly for your short term or vacation rental business. These are all possible–not certain–deductions you can exploit. Your asset protection entity may also be of assistance in managing taxes, so be sure to let your relevant professionals know how you control the rental asset. If you live in the home, this may not apply directly, but it’s still good to know where the divisions between your personal and business-owned assets are.

How Can I Bolster My Vacation Rental Business’s Chances of Success?

Following the above advice to the letter is a great start. But on top of excellent record-keeping, there are some other pro-tips to keep in mind when you establish your Airbnb or short-term rental business. Here are a few to get you started.

Offer Excellent Service

This may seem obvious bordering on cliche, but it also happens to be the truth. If two businesses offer the same product or service for the same price, how do you decide who to go with?

Really?

Think about it for a moment.

Now think about what would make an outstanding vacation rental. Really practice empathy and put yourself in the position of your likely traveler demographic. Write down everything that comes to mind, and aspire to offer the level of customer service you’d expect in a place twice as nice as what you’re offering. Hosts who go the extra mile tend to be rewarded on the Airbnb platform with designated statuses, high booking rates, and even featured listings. Truly offering the best experience of the space you have available, whether it’s a humble lodging for a solo traveler far from home or a beach condo for a family getting away from it all, will make you stand out on the platform and with your clientele. So go the extra mile.

Expect the Unexpected & Offer Simple, Thoughtful Solutions

Airbnb has lots of great advice for hosts. You can expect to go through more things than an average household: linens, cleaning supplies, trash bags, even certain food and beverage if you offer it. Get all the free information you can, but also plan for emergencies.

Here’s a common one few will warn you about: the need for an extra mattress. A $40 Walmart mattress not only could bail a guest out of a bad situation or furniture malfunction: it also counts as an extra bed to offer future guests. Think ahead about common mishaps, and if you can’t anticipate them, at least try to be available to respond. Consider also the types of items people forget when traveling. How many times have you found yourself without a hair dryer (an actual amenity you can list on Airbnb, for the record), deoderant, feminine products, contact fluid, Advil, or some other cheap but oh-so-essential item? After all, those are things you tend to need quickly when you need them. Keeping guest bathroom drawers stocked with such basics will put anxious guests (or those who meet a traveling misfortune) at ease.

Bonus: Those loving gift baskets? You can write all their contents off later.

Have a Plan for Responsiveness

We all know nonsense just happens when you travel. Planes are late. Layovers extend. Baggage gets lost. These types of situations can leave new Airbnb travelers feeling especially nervous. But the beauty of the platform is that you become that person’s touchstone to the city. If you cannot personally manage your Airbnb offering, it really is a good idea to get some full-time assistance.

Responsiveness is actually measured by the Airbnb app. Hosts with high levels tend to perform better. If you aren’t able to manage your property alone, recruit a friend, family member, or even friendly graduate student to help. Offer them a fair price to help you out wherever you need. Maybe that’s just a modified maid service, maybe it’s help maintaining your account, or even a hybrid of the two with your own needs mixed in. Just be sure that if you do hire an individual, you are clear on their role as a contractor. It never hurts to solidify even the most informal relationships with a solid contract.

Choose the Right Professionals for Help

Knowing when you need a lawyer or CPA can be critical. The smartest investors generally have a real estate attorney involved when it comes time to buy, sell, or transfer property. Many will set up asset protection systems in advance but also use their attorney for advice on growing their business. CPAs are more essential for tax-specific questions, though you will generally find real estate attorneys are at least aware of the issues likely to affect clients.

Nonprofessionals can also be helpful to you. Form your own personal-professional network of fellow Airbnb hosts, and don’t be afraid to make a few “aspirational friends” along the way. You know, the kind you want to be like. Following in the footsteps of someone who has had success is a good way to learn the industry quicker–and see your profits faster.

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