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My family did Airbnb last month. We rented a nice cottage in northern Michigan. The price was right and it was comfortable…except for the ants. There weren’t a lot, but enough that I emailed the home owner/host. She never responded but we dealt with it. After all, our expectations weren’t as high as if it were a hotel. Our host was sharing her home and we had a friendly, casual relationship.
Or did we? When does sharing for a fee morph into something more formal? That, of course, got me thinking about taxes. And how the space between home sharing and providing lodging services sits in at least three shades of gray.
Some background: One in ten Americans (11 percent) used a home sharing service last year, according to a survey by the Pew Research Center. Like ours, the majority of rentals, 63 percent, are for an entire home without the presence of the owner. Our host lives in her home most of the time, but travels a lot. When she is in town and has paying guests, she stays with her mother down the road.
About those taxes: There are at least three interesting issues— sales and occupancy taxes, property taxes, and income taxes.
In many jurisdictions, hosts must collect occupancy taxes from their renters. We owed Michigan’s 6 percent use tax on our rental fee which our host was to collect. But, like about one-third of hosts in Michigan, she didn’t, leaving it to us to report our online transaction and pay the state.
In Michigan, at least, that’s about to change: As of July 1, Michigan short-stay renters will pay the tax when they rent through a sharing platform, which remits to the state treasury.
Then, there is a matter of property taxes. Many jurisdictions have homestead exemptions that reduce taxes for owner-occupied homes. Were we vacationing in our host’s home, or in what is effectively a commercial rental property? The local county has lots of rules about whether our host would be eligible for a exemption of up to $1,800. Does she qualify? It is hard for us to know and probably difficult for jurisdictions to check.
Finally, there is the matter of income taxes. Tax accountant Tony Nitti has a nice primer on the topic in Forbes. The general test: How many days per year does our host rent her home?
If the answer is less than 14 days, she generally gets to enjoy that rental income tax free. If it is not her primary residence and she rents for more than 14 days, the IRS defines it as a rental property. She’d owe taxes on her net rental income, but could deduct business expenses associated with running her rental business such as mortgage interest, real estate taxes, operating costs, and depreciation on the rental property.
Then there’s the third situation. If she rents the home for more than 14 days, but lives there for either 14 days or 10 percent of rental days, whichever is greater, the IRS considers her home a residence. In calculating income from her rental business, she still gets to deduct rental expenses. She can’t claim a tax loss but can minimize her federal income taxes due on the rental activity income.
I hope our host gets good tax advice. Of course, there’s something about the need for a good tax accountant that makes the relationship between my family and our Airbnb host seem a little more… formal, don’t you think?
Airbnb also is evolving. To build its business, the sharing platform is starting to compete more aggressively for traditional hotel customers.
As The New York Times recently reported, it’s encouraging its hosts to professionalize their operations and treat their guests as customers rather than future friends. That means making a bathroom look more like a hotel’s—no more funky shower curtains, random half-empty bottles of shampoo, or, um, ants.
It also means collecting the taxes your renters owe. (Nothing says “professional” and “we are not friends” like collecting taxes.)
Admittedly, I am an Airbnb novice. But it’s hard to deny that our host may be earning a decent income while sheltering her taxes by a fair amount, thanks to guests like me. In light of that, perhaps, my expectations should have been higher. I should have treated our relationship more seriously.
In the sharing economy, there are certain issues that gray. But some are black and white. And nothing says “professional” like “ant-free.”
The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Anick Jesdanun/AP Photo