For Airbnb hosts, classifying as a real estate professional is can have a major impact on your tax liabilities. In this post, we’re going to explain what a real estate professional is and it affects your taxes.
What is a Real Estate Professional?
The IRS classifies taxpayers who spend the majority of their time in real property businesses as real estate professional. To qualify, you must provide more than one-half your personal service in real property businesses. You also must perform more than 750 hours of services during the tax year.
You must meet both of these qualifications to qualify as a real estate professional. Real property businesses or trades include real property development, such as redevelopment, construction,or renting.
The IRS treats each rental property as a separate business unless you elect to have them treated as a single activity.
You must meet both tests for all your properties. Qualifying for one property doesn’t mean you have real estate professional status for all your properties.
You don’t have to have a real estate license in order to qualify as a real estate professional. You don’t have to work full time in real estate either. All you have to do is meet the two tests mentioned above.
The benefit of being treated as a real estate professional is that any net income and losses from your rental activities will be treated as non-passive, permitting deductions against the other income that you earn. These tests apply on an annual basis, so your status might change year to year. As a result, you may be considered as a real estate professional some years and not in other years.
Check out our full blog post on the topic here.
Is an Airbnb Host a Real Estate Professional?
An Airbnb Host must meet both of these tests to be considered as a real estate professional for a single property unless you elected is considered as a real estate professional for all rental properties. The Airbnb host must qualify on his or her own; the test results cannot be split between spouses.
As your property portfolio grows, it becomes difficult to meet the qualifications for each property. You have to calculate and maintain time logs to document the time you spent on each rental property. If Airbnb income comprises most of your income, you should consider claiming Section 179 as a real estate professional.
How Personal Services Effect Airbnb Hosts
Personal Services that are provided by an Airbnb Host include renovations, repairs and maintenance. However, this doesn’t mean that you have to perform the work. You could engage in personal services simply by supervising, meeting or planning the activities.
If you qualify as a real estate professional, the IRS doesn’t classify your income as passive. Real estate professionals must report rental income on Schedule C and pay self-employment taxes.
Section 179 Deduction
Section 179 allows businesses to deduct the cost of any long-term property used for business in the first year. Usually, taxpayers have to depreciate their property over several years. You can only claim Section 179 if your rental activities qualify as a business, so you must file Schedule C to qualify.
Some items you can deduct include kitchen appliances and carpets. However, you can’t deduct land, land improvements, or air conditioning/heating units. You can also deduct personal property used for your rental business as long as it’s located inside the buildings you rent. These items include computers, telephones, office equipment, and furniture, vehicles, maintenance equipment, and vehicles. The limit is $500,000 for 2015 and beyond. However, it is $25,000 for sport utility vehicles (SUVs).
You can’t claim Section 179 for property acquired for the sole purpose of producing rental income. This rule also excludes rental assets and capital improvements. However, you can claim property for hotels, motels, and vacation homes where guests stay less than 30 days. As a result, qualifying Airbnb hosts can claim Section 179 in most cases.