With summer vacation season rapidly nearing, lots of Americans are getting ready to rent their homes. This is easier than ever to do with services such as Airbnb, HomeAway and VRBO.
It's nice to receive some extra income from vacationers who are willing to rent your home. But it also pays to know the rules on reporting rental income on your tax returns.
When the home you rent is your residence or your vacation home, the basic rule is that when you rent for short periods of time, the income received can be completely tax free. Specifically, under the vacation home rental rules, if you rent your residence for 14 days or less and you personally use the residence for 15 days or more (or 10 percent of the total days it was rented to others), then any income you receive is tax-free.
If this is your situation, you don't have to report the rental income or claim a deduction for any rental expenses on your tax return. Just make sure you keep good records of the dates of the rental use and your personal use.
But if you rent your home or apartment for more than 15 days, you'll have to report the rental income. You should know about the form you'll be required to file, called Schedule E - Supplemental Income and Loss. You'll also need to know the rules for reporting rental income and expenses, which are included in IRS Publication 527, Residential Rental Property.
You'll also have to file Schedule E with your tax return. On it, you'll report the number of rental days and personal-use days. The gross rental income you received is reported on this form as well as deductions for rental-related expenses.
If you use a home-sharing service, such as Airbnb or HomeAway, rent payments you receive flow through the services, and they'll send you a form 1099 - MISC. This means they let the IRS know the total amount of rental income you received from guests who rented through the service.
When you claim deductions against your rental income, you can claim two types of expense: Direct and general. Direct expenses are the costs you would not have incurred "but for" the fact that you rented your residence. The clearest example is the commission you paid to a rental service. Say you received $5,000 in gross rental income and paid a $500 in commission to the agent. In this example, the commission paid is 100 percent deductible.
Other examples of direct rental expenses include advertising, credit background checks on renters, rental insurance, cleaning, repairs and maintenance of the rental space, and travel costs directly related and solely incurred due to the rental activity.
You can also claim a deduction for general rental expenses, which are costs that you incur to maintain the residence. While these costs are directly related to the residence, they aren't directly related to the rental activity. They're expenses you pay all year long for things such as maintenance, mortgage interest, real estate taxes, cleaning, utilities, heating fuel, security, internet and cable TV, etc.
The amount of this category that you can claim as a deduction must be prorated by the number of days of rental use as a percentage of personal use. So if you rented your home for 32 days and used it personally for 333 days, 32 divided by 333, or 10 percent of your general expenses, would be deductible.
If you rented only 20 percent of your home (by number of rooms or by square footage), you would have to further limit this amount by 20 percent to come up with the deductible amount. After deducting the applicable expenses from your gross rental income, use Schedule E to calculate the net rental income to report on your return.
A final note: When the property you rent is your residence or a vacation home, the rental expenses you can claim as a deduction cannot be more than the gross rent you receive.