Airbnb – As Discussed by a Road Warrior, a Homeowner and a Tax Accountant

Stan Rose, Tax Director
October 2015

Introduction
Following is the transcript of a hypothetical interview that could have taken place in our office between three people:  One is a Road Warrior who recently traveled using the increasingly popular Airbnb lodging service, another is the Homeowner who provided that lodging, and the third is a Tax Accountant.  They were discussing the tax impact and reporting of an Airbnb stay from the perspectives of both the traveler and the host.

For those who don’t know, Airbnb is a web-based service that matches people who need lodging with parties who provide it.  A common use of the service might involve a business traveler (the “guest”) staying in the private residence of another person (the “host”) who is also out of town.  Airbnb (an abbreviation of Air Bed and Breakfast) merely plays matchmaker and handles the collection and payment of fees.

Transcription

Tax Accountant: I’m glad you agreed to meet so we can resolve the questions you have about your recent transaction.  How can I help?
Homeowner: I recently “rented” my home using Airbnb and need to know if that income is taxable.
Tax Accountant: There is a very unusual provision in the tax law that applies only if the home is rented 14 or fewer days per year.  It is found in Internal Revenue Code Section 280A(g).  If its criteria is met, the rental income is not taxable at all, and does not need to be reported on your federal tax return.  This often is referred to as the “Masters exemption,” because it is commonly known for allowing homeowners near the Augusta, GA area to collect very large amounts of money for short-term rental of their homes during the golf tournament – all completely tax-free.
Homeowner: What happens if I rent for a 15th day? 
Tax Accountant: The income (all of it – beginning with rental day #1) is taxable, but on a net basis, after considering any direct and allocated expenses.  Allocated expenses may include mortgage interest and property taxes, and very strict and complex rules prescribe how to allocate such costs. 
Road Warrior: I understand that I may be required to report my lodging payments on a Form 1099 issued to the host.  Is that right?
Tax Accountant: Sort of, and only if certain criteria are met.  First, a 1099 is needed only if the cost was incurred as part of your trade or business and paid to an unincorporated recipient.  Outlays related to a personal vacation, for instance, are not reported on a 1099.  Then, the cumulative payments to any one recipient must exceed $600 per year to be reportable.  However, recall that your payment was made to Airbnb, not the host herself.  You will not issue a 1099 to the host.  Airbnb, however, may issue a 1099 to that host, assuming its total payments to her exceeded $600 in that year.
Homeowner: But I won’t receive a 1099 if I rented for fewer than 15 days, though, right?  You said rental payments are not taxable at all if I stay under that threshold.
Tax Accountant: Unfortunately, the income reporting requirements of the recipient do not match the payment reporting requirements of the payer.  Even if Airbnb knew that you rented only through them, and that the total days did not exceed 14, and therefore you will not be taxable regardless of the amount of those payments, they are held to a different standard.  If the annual payments exceed $600, they must report it as taxable income on a Form 1099 – even if everyone is in agreement that the payments are not taxable!
Homeowner: You understand this is why nobody likes dealing with taxes, right?  Won’t the IRS be looking for that 1099 amount on my 1040?
Tax Accountant: Yes, they will.  But if the income legitimately should be excluded from your return, you should consider entering the amount on your 1040 (to allow the IRS to match the 1099 with your 1040), and then adding a second, offsetting entry to reduce that amount to zero (creating the correct outcome).  You can explain that reduction with an attachment to the return. 
Homeowner: Are there any other tax implications as long as I rent for 14 days or fewer?
Tax Accountant:Possibly.  The exclusion related to the 14 day limit applies only to rental use.  No such exclusion applies to services.  Technically, if you provide cleaning or laundry services, or even food in addition to lodging, a portion of the “rent” payment really relates to those services, and that portion is taxable.  There is very little guidance on this matter, but a true following of the rules would call for an allocation of revenue between taxable and nontaxable, offset with what likely would be some modest expenses related to the provision of those services.  Also, although most states follow the federal rules regarding income taxability of these payments, it is possible that state or local sales or lodging taxes may apply; each state is different.
Road Warrior: Are there any tax implications for me from my use of Airbnb?
Tax Accountant: Most of the issues exist on the host’s side.  Travel and lodging costs are accompanied by some tax rules related to accountable plans and supporting the business purposes for the outlay, but there really is nothing unique about Airbnb from a guest’s perspective – nothing that distinguishes it from other more mainstream sources of lodging for the traveler.

Conclusion
As readers can see, this relatively new Airbnb service (and there are others like it) creates an interesting set of tax concerns – for the host.  The “rental” income may be tax-free if total rental days do not exceed 14 per year, but the host’s unwelcome receipt of a Form 1099 may (rightly or wrongly) suggest otherwise.  To avoid holding up the processing of his or her tax return, the host may need to attach documentation explaining the disparity.  Also, only rental payments can qualify as tax-free.  Any payments attributable to services are fully taxable, and there is no 14-day limit that will prevent it.

If you would like to discuss further, please call Stan Rose or your BNN tax advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.