How does the TCJA Impact Airbnb and Other Short term Rental Hosts?
posted Jul 19, 2018 by Leigea Landry, CPA, MST in the Restaurateur Blog
Do you use an online rental service like Airbnb, HomeAway or VRBO to rent out your vacation home in the summer? Be mindful of important changes from the TCJA that may impact your position as a short term rental host.
5 ways the TCJA has changed taxes for short term rental hosts
The new pass-thru deduction for trade or business activities- A lot of short term rental hosts are individuals who earn income from individually owned businesses or pass through entities. The TCJA creates a brand new tax deduction by which individuals (like short term rental hosts) can be eligible to deduct up to 20% of their qualified business income from income taxes. This is on top of all your other rental related deductions. How much you’ll be able to deduct depends on your taxable income and how much you earn through rental activity. High earners are limited to a 2.5% deduction of the cost of their rental plus 25% of amounts paid to employees (which short term hosts usually don’t have to worry about!)
Simpler process for writing off expenses- Getting new furniture or appliances for your rental property? You can write off all or part of this as a rental expense…and the TCJA makes this easier than ever before. Short term hosts (for 2018-2022) will be able to use 100% bonus depreciation to write off the full cost of long-term personal property they use for their rental business. Bonus depreciation can now be used on new and used personal property, but not real property.
What about section 179? Hosts can use this popular tax break to deduct, in one year, up to $1 million of personal property purchased to furnish lodging. Bear in mind that Section 179 may only be used for property that is used for renting at least 50% of the time.
New limits on property tax and mortgage interest deductions- Prior to the TCJA, individuals could deduct interest on up to $1 million of acquisition indebtedness. The TCJA reduces this to $750,000. Also, the itemized personal deduction for real property taxes is capped at $10,000 for the portion allocated to personal use of the property. The portion allocated to rental property is not limited.
Hobby expenses are no longer deductible- The TCJA completely removes the personal deduction for hobby expenses. Therefore, the income from a rental activity classified as a hobby must be reported and tax paid, and no expenses may be deducted. Most rental activities qualify as businesses or investment activities. Rentals that are not profit-motivated are required to be classified as hobbies.
- Lower income taxes on rental profits- Nearly all short term hosts pay income tax on their rental profits at their individual tax rates, but the TCJA has reduced individual income tax rates for nearly all taxpayers. So it’s likely that you’ll pay less tax on your profits going forward.
The good news is, the TCJA changes for short term rental hosts are mostly positive. Just make sure you read up on your requirements before you book renters this summer. Contact your tax advisor if you need further assistance navigating the changes. We can always help if you need it- contact us today!