Tax Implications of Airbnb Apartments or a New Accessory Dwelling, Addition or Remodel

Derek Davis, the founder of Shared Economy CPA, just spent some time explaining tax implications of creating an Airbnb rental or building a new home, accessory dwelling or addition for yourself or family.

Taxes are clearly complex and an expert is needed – I actually sought Derek out for advice for my own rental and his insights seemed quite valuable and worth sharing.

I see two big topics to consider:

1) Airbnb rentals can make your income from rentals “active”, which may mean that you qualify for more deductions than with passive income.

2) Expenses to health care can include very large big ticket items (i.e., a pool counts if your doctor says you should swim). An accessory dwelling or major components of your accessory dwelling/addition/remodel may also qualify for big deductions.

Here is a summary of our interview:

What does it cost to have you manage our taxes:

Tax return preparation is approximately $500-$550 and is performed by a Certified Public Accountant (CPA). Our clientele include people who rent out their homes on Airbnb.

Describe a typical Airbnb host:

– Some are active.  They do the day-to-day activity with booking, cleaning, welcoming.

– Some are partnership companies who transform rental property into Airbnb units. They collect rent as passive income. Something like AirEnvy can make managing many units easy.  This generally makes this endeavor a Schedule E activity for the owners.

There is a 7-point test to determine if a person is “Active” vs “Passive” income

The IRS has this test: http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Passive-Activity-Loss-ATG-Exhibit-4-1-Material-Participation

One aspect of this test is to determine if your income is active or passive:

– If two or more partners are involved, then it’s 100 hours or more to qualify.

– One partner, then it’s 500 hours.

– Generally, the IRS estimates Airbnb hosts are putting in 15-30 minutes every day. This time adds up and can snowball the income type into an “active” status.

Shared Economy CPA always goes through the full seven-point test and creates full documentation in case a listing ever gets questioned by the IRS.

Working with The Shared Economy CPA:

  • Contact them and set up a call: http://www.sharedeconomycpa.com/
  • They send a secure portal “SecurePro” for you to share all your documents
  • They do the return, send to you for review
  • Issue and pay tax preparation fee
  • They file your taxes
  • They send a copy to you for your internal reference

Tax Tips for People Who Want to Build an Accessory Dwelling or Addition: New Avenue’s clients have many different reasons for building an additional unit.

If it is solely for Airbnb rentals: Capital expenses (to improve the actual unit) can be capitalized over 27.5 years, and every year they can take depreciation as a deduction.

If the expenses that are incurred are ordinary and necessary, they can be considered deductible by the IRS. Such expenses can include:

  • Mortgage interest
  • Rent payments
  • Utilities
  • Cleaning fees and related payments
  • Insurance expense
  • Home repairs
  • Direct expenses (furniture, bed, bed sheets, pillows, etc)
  • Mileage – standard mileage or actual cost
  • Proportionate cell phone expense
  • Education expense (if you’re in school!)
  • Tax preparation fee
  • Health insurance premiums

If it’s for yourself or an aging parent who needs an accessible home: If you have to build a ramp, then the ramp is deductible if it didn’t improve the property value. Whatever portion didn’t improve your property value can be considered deductible.

10% of AGI threshold that you have to overcome.  If AGI is $10,000 and expense is >$1,000, say $1,500, then you can deduct $500 as a medical expense on Schedule A.

If you get a note from a doctor saying that you need to improve your home, for example, to put in a therapy pool, in general it can be considered deductible as a medical expense.

General Thoughts from Shared Economy CPA:

Keep Excellent Records: You definitely want to keep good and clear records. There are four criteria for a record to be considered acceptable: name, date, amount and characteristics. A great tax app that allows you to keep track of your deductions is Tabby.  Tabby is free to use and keeps organized records, so you do not need to keep receipts, Excel logs, or paper and pencil. Their website is www.trytabby.com.

Separate Personal and Business: For Airbnbers, make sure you separate personal and business expenses and pro-rate it. If you are building a rental unit for Airbnb, track how many days are for personal vs. how many are for business.

Allstar Student: Understand What a Schedule C vs. Schedule E: Or just hire a good tax person.

File Estimated Taxes: If you get a bunch of 1099s you’re in for a real surprise at the end of the year if you haven’t paid your estimated taxes. There can also be penalties for not paying the estimated taxes.  Make sure to pay estimated taxes throughout the year.

The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice.  Further, it does not give personalized legal, tax, investment, or any business advice in general.  For professional consultation, please sign-up for our services at http://www.sharedeconomycpa.com/.

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Have any questions? We are available to discuss your goals & ideas. There’s no fee or commitment. To request a time for a call, just click here and tell us when to call you.