Is Airbnb a Source of Tax-Free Income for Property Owners? It Depends.

The rising popularity of online home sharing sites such as Airbnb, Homeaway and FlipKey have made vacations and other out-of-town trips more affordable than ever for travelers. If your home-town is hosting a major concert, sporting event or world leader’s visit like the Pope’s recent stop in Philadelphia, owners can rent out their residences at attractive prices to savvy travelers who don’t want to go the traditional hotel/motel route. While the home-sharing sites mentioned in this post make it easy to rent out your property–and potentially make a quick buck–there are a few details to keep in mind as you make the transition from property owner to temporary landlord/hotelier.

Tax-free income–less than 15 days 

There aren’t many “freebies” within the draconian U.S. tax code, but amazingly there is one that has stayed on the books—the “Masters Exemption.” That’s the IRS provision that lets owners rent out their primary or vacation homes tax-free for up to 14 days per year. The Master’s Exemption gets its name from the longstanding practice of Augusta, GA residents who rent out their homes–for very tidy sums– for one week every April when the world-famous Masters golf tournament comes to their town. That’s right, the IRS allows home owners to collect rental income tax-free as long as they don’t do so for more than 14 days per year—it doesn’t even have to be for 14 consecutive days.

Some enterprising Augusta residents pocket 6-figures a year in tax free-rental income thanks to the Masters Exemption and so can you. Just remember that sharing sites such as Airbnb are required to send both the taxpayer and the IRS a 1099 form informing both parties about how much income the host received by renting out their property through them.

A problem arises when the hosts receive automatically generated letters from the IRS asking for information about the rental income they earned, even though no tax is due. It is important for the host to keep accurate records of all rental transactions, including any types of rental agreements they created, the dates of rental and how much they charged. Keeping good records can head off any confusion the IRS may have about the nature of the rental income received.

Renting for 15 days or more

Renting a property (main residence or second home) for more than 14 days disqualifies you from the tax-free provision. However, in most cases, you still get to deduct your rental-related expenses against any rental income you receive. However, there are very strict guidelines and limits governing these expense deductions and it’s best to consult your tax/financial advisor(s) before doing so.

Conclusion

The IRS’s tax-free income provision regarding rental income for less than 15 days, aka the Masters Exemption, is a great tool for anyone looking to make some extra money by renting out their primary or secondary residence. Although the rules become much stricter after 14 days, utilizing home sharing sites such as those mentioned in this post are a great way to participate in the burgeoning sharing economy and generate some extra income.  If the Super Bowl or another U.S. Open comes to the Philadelphia area, don’t forget about taking advantage of the Masters Exemption to generate some extra tax-free income on your residence(s).

I know I will definitely be looking into it.

 

1. Historical performance is not indicative of any specific investment or future results.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss of income and/or principal to the investor. 2.  Nothing in this communication is intended to be or should be construed as individualized investment advice.  All content is of a general nature and solely for educational, informational and illustrative purposes. 3.  Adviser is not licensed as a tax professional and does not provide or intend to provide any tax-related services.

 

About Patrick Melvin Jr.

Patrick D. Melvin Jr., is a Wealth Manager at Independence Advisors, LLC. Pat models client’s financial plans and works with the firm’s clients on financial planning areas such as retirement planning, investment planning and estate planning. CLICK HERE TO ASK PAT.

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