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Using Online Agents to Rent Your Home Short Term? You May Be Surprised at the Tax Ramifications

Article Highlights:

  • Schedule C vs. Schedule E 
  • Rentals of Less Than15 Days 
  • Rentals of 7 Days or Less 
  • Rentals of 8 to 30 Days 
  • Exception to the 30-Day Rule 
If you are among the many taxpayers renting your first or second home using rental agents or online rental services that match property owners with prospective renters, such as Airbnb, VRBO and HomeAway, then you should know the IRS has special rules related to short-term rentals.

When property is rented for short periods, special (and sometimes complex) taxation rules come into play, which can make the rents excludable from taxation; other situations may force the rental income and expenses to be reported on Schedule C (as opposed to Schedule E).

If you have been renting your home or second home for short periods of time, here is a synopsis of the rules governing short-term rentals so you can prepare yourself for the upcoming tax season.
  • Rented for Fewer Than 15 Days During the Year: If you rent your property for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. However, interest and property taxes are still deductible as itemized deductions on your Schedule A. 

  • Rented for an Average of 7 Days or Less: Under normal circumstances, rentals are treated as passive activities, which are reported on a Schedule E, and net profit from the rental activity is not subject to self-employment tax. But the special rules treat short-term rentals averaging 7 days or less as a trade or business similar to that of a hotel or motel, with the income and expenses reported on Schedule C, and the profits are subject to both income tax and self-employment tax. 

  • Rented for an Average of 8 to 30 Days: Even rentals for longer than 7 days are treated as a trade or business when substantial personal services are provided to the short-term tenant. Substantial services are those that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service. Substantial services do not include the furnishing of heat and light, the cleaning of public areas, trash collection, and such.

    When extraordinary services are provided, the rental is treated as a trade or business and reported on Schedule C regardless of the average rental period. However, it would be extremely rare for this to apply to short-term rentals of your home or second home. 

  • Exception to the Significant Services Rule – If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as the cleaning of public areas and trash collection), and if the rental also includes maid and linen services at a cost of less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the purposes of the 30-day rule. 

A loss from this type of activity, even when reported on your Schedule C as a trade or business, is still treated as a passive activity loss and can only be deducted against passive income. The $25,000 loss allowance that applies to some Schedule E rentals is not available for rental activities reportable on Schedule C.

It is important that you keep a record of not only the rental income from each tenant but also the duration of each rental, so the average rental term for the year can be determined. If you have questions about your rental activities, please give this office a call.





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If you received a notice or letter from the IRS or Oklahoma Tax Commission, keep it available. That document usually tells us what the agency is requesting, the deadlines involved, and what information we may need next.

What Happens Next?

Our staff will first gather some basic information and determine whether the matter is something our firm can assist with.

If appropriate, the next step is a paid one-hour strategy meeting with former IRS Revenue Agent, Austin Murray, CPA. During that meeting, we review the notices and relevant records in detail and discuss the available options.

If you engage Millennial Accounting for representation, the consultation fee is applied toward the representation retainer.

Helpful Documents to Have Available

  • IRS or Oklahoma Tax Commission notices

  • Prior tax returns

  • Accounting or payroll records

  • Previous correspondence with the taxing agency

  • Any documents specifically requested in the notice

Important:
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