When you ask a tax strategist about one of the best ways to generate passive income, you’ll be advised to consider Airbnb. Owning an Airbnb gives you a higher potential return on investment. So whether you are just starting a real estate investment or trying to diversify your business, Airbnb properties are a great option.
However, like any other business, Airbnb owners must pay taxes. If you are an Airbnb host, it’s essential to understand that you are considered an owner of a real estate rental property and not a small business when it comes to your taxes. In addition, hosts are required to fill their Airbnb tax returns correctly to avoid IRS penalties. And that’s why you need a tax strategist to help you.
Here are some of the most frequently asked questions that can help you in 2023!
Do I Have To Pay Taxes On My Airbnb Income?
Yes, you have to! If you are a professional short-term rental host, your Airbnb will likely be considered a business subject to tax by the IRS. The only exception to this is if you rent out your property for fewer than 14 days per year.
How Do I Prepare An Airbnb Tax Return?
Before preparing your Airbnb tax return, it’s essential to know which type of rental you have. Your short-term holiday rental on Airbnb, VRBO, or another platform could either be a passive real estate investment or a real estate business.
Airbnb Hosting As A Business Or Passive Income
If you have a short-term rental with an average stay of seven days or less and extensive services, your Airbnb business is considered a real estate business. This means your real estate business will be reported on Schedule C, sole proprietorship.
When preparing your tax return for Schedule C, you should show the income you receive from your short-term vacation rental and subtract expenses such as HOA dues, utilities, repairs, furniture property tax, and others from your income. Additionally, you can also take a deduction for property depreciation.
On the other hand, if your rental is a passive real estate business, you will be reporting on schedule E. Like other businesses, you are required to report all the income and expenses from your business activities.
What Are The Tax Differences Between Real Estate Businesses And Real Estate Investment For Airbnb?
Since a real estate business is just like any other business, meaning that it is subjected to self-employment tax. When there is a loss, the loss can be used against other income, enabling you to take deductions for the loss against other income in the business as long as you actively participate and have a sufficient tax basis. The standard for active participation requires little. All you need to do is to show that you are involved in the whole process of operating and renting the Airbnb property.
For a Schedule C sole proprietorship like your Airbnb real estate business, you’ll have a self-employment tax rate of 15.3% on your state and federal income tax.
In contrast, passive real estate income is exempt from self-employment tax. However, losses may be restricted if the basis is insufficient and your adjusted gross income (AGI) is greater than $100,000.
How Much Taxes Would I Pay For My Airbnb Income?
The amount of taxes you’ll pay as an Airbnb host depends on your rental income and other deductible expenses you might be eligible to claim to help reduce your tax liability. Apart from your annual tax filing, you might also be required to pay estimated taxes on your Airbnb annually, quarterly or monthly, depending on your income. You can estimate the amount of tax you owe on your Airbnb income with a tax calculator.
How Do I Take Tax Deductions As An Airbnb Host?
Take it from an expert tax strategist; the fact that you have to pay taxes doesn’t mean you have to sell yourself short during tax season. Here are a few tips to help you maximize your deductions.
- Keep accurate records: if you own an Airbnb property, you can’t afford to be disorganized. Organize your documents from the beginning. Keep all necessary records from bookings to vacancy dates and other related documents to ease your stress when it’s time to file taxes. Keeping proper records is an excellent way to determine the kind of deduction you can take. It also helps you take advantage of any special tax credit you qualify for.
- Don’t forget your accelerated depreciation and cost segregation: Airbnb hosts often overlook the power of depreciation and cost segregation. Depreciation and cost segregation is a tax strategy that helps you convert traditional depreciation into asset-based depreciation. This allows you to write off the cost of purchasing or improving your Airbnb rental property. It can significantly increase your Airbnb tax deductions.
- Track and claim your deduction: the IRS doesn’t wait to send you the bill, so don’t wait to claim a deduction when you get the chance. Tracking is vital in ensuring you don’t miss any significant deductions.
- Get a Tax Strategist or virtual tax preparer: nothing beats getting professional advice when it comes to taking Airbnb tax deductions. A tax strategist can help you make sense of the complexities of operating an Airbnb business, ensuring you meet all requirements and help you identify potential tax deductions.
Do I Need A Tax Strategist Or Virtual Tax Preparer For My Airbnb Business?
While it’s possible to prepare an Airbnb tax return yourself, the best way to prepare an Airbnb tax return is to get a good tax strategist or virtual tax preparer.
Whether you are a new host filing your Airbnb taxes for the first time or a seasoned host with decades of experience, you should know that Airbnb taxes can be pretty complicated, and that’s why you need a tax strategist or virtual tax preparer.
Your Airbnb tax is not just a report; neither is it a tax strategy nor a tax plan. Instead, it’s a detailed report on your tax strategy and can be the single deciding factor on whether you get an IRS audit or not.
Would you rather prepare your Airbnb taxes yourself and get an IRS audit or get an expert tax strategist to prepare it for you without issues?
Get Help With Your Airbnb Tax Deductions
We know it is challenging to understand the complexities of real estate taxes, especially when you’re trying to maximize deductions. However, seeking professional help ensures you get the most out of your real estate tax deductions. To save yourself from the chaos and stress, reach out to the Tax Goddess Team for a free consultation and sign up for our newsletter for free tax tips.