How to Calculate Taxes for Your Airbnb Business

Understanding the tax implications of operating an Airbnb business is an important part of being a host. Income generated from short-term rentals is generally subject to taxation, and hosts need to understand how to calculate and report these earnings and associated expenses. This article will guide you through identifying taxable income, understanding deductible expenses, reporting income and expenses to the federal government, and considering state and local tax obligations.

Identifying Taxable Income

Income earned from your Airbnb rental operations is generally considered taxable by the Internal Revenue Service (IRS). This includes the primary rental income guests pay for their stays. Other charges collected from guests also constitute taxable income, such as cleaning fees, late cancellation fees, and any other fees or charges guests pay.

Reimbursements for property damage can also be considered taxable income if the funds are not fully used to repair the damage or if they exceed the actual repair costs.

A specific consideration for hosts is the 14-day rule. If you rent out your property for 14 days or fewer during the calendar year, and you also use the property for personal purposes for at least 14 days or more than 10% of the total days it was rented, the rental income is generally not taxable. However, if you meet this rule, you cannot deduct any expenses related to the rental activity. If you rent your property for more than 14 days, all rental income is taxable and must be reported.

Understanding Deductible Expenses

Hosts can reduce their taxable income by deducting ordinary and necessary expenses incurred in operating their Airbnb business. An ordinary expense is common and accepted in the rental business, while a necessary expense is appropriate and helpful for managing and maintaining the property.

Significant deductible expenses include mortgage interest and property taxes. If you have a mortgage on your rental property, you can deduct the interest portion of your payments. Property taxes paid during the tax year are also deductible. The amount deductible for these items is generally proportional to how much of the property is used for rental purposes.

Utilities (electricity, gas, water, internet) are necessary for running your Airbnb property and are deductible. Cleaning and maintenance costs, including professional cleaning services, supplies, and laundry expenses for linens, are also deductible. Repairs, which maintain the property in good condition, are generally deductible in the year they occur. This contrasts with improvements that add value or prolong the property’s life, which are capitalized and depreciated over time.

Supplies provided to guests, such as toiletries and linens, are deductible expenses. Professional fees for services like property management, accounting, or legal advice are also generally deductible. Advertising and marketing fees, including fees paid to platforms like Airbnb, can be deducted as well.

Depreciation is a non-cash deduction allowing you to recover the cost of your rental property over its useful life. For residential rental property, the IRS generally assigns a useful life of 27.5 years. You can deduct a portion of the property’s purchase price, excluding the land value, each year. This deduction helps reduce your taxable income, even though it is not an out-of-pocket cash expense.

When a property is used for both personal and rental purposes, expenses must be allocated. You can only deduct the portion of expenses related to the rental use. For example, if you rent out your property for 200 days a year and use it personally for 50 days, approximately 80% (200/250) of shared expenses like utilities or mortgage interest would be deductible.

Reporting Income and Expenses

Airbnb hosts are generally considered self-employed for tax purposes. This status dictates how income and expenses are reported to the IRS.

The primary forms used for reporting Airbnb income and expenses are Schedule C (Form 1040), Profit or Loss from Business, or Schedule E (Form 1040), Supplemental Income and Loss. Schedule C is typically used if you provide substantial services to guests, similar to a hotel, such as daily cleaning, meals, or concierge services, and if your rental activity is considered an active trade or business. Schedule E is generally appropriate for passive rental income, where you primarily provide lodging without significant additional services. Many short-term rental hosts, especially those with average stays of seven days or less, often fall under Schedule C.

If your Airbnb activity is classified as a business and reported on Schedule C, you will likely be subject to self-employment tax. This tax covers Social Security and Medicare contributions for self-employed individuals, currently at a rate of 15.3% on net earnings from self-employment. This self-employment tax is reported on Schedule SE (Form 1040), Self-Employment Tax. Rental income reported on Schedule E is generally not subject to self-employment tax.

Airbnb may issue Form 1099-K, Payment Card and Third Party Network Transactions, if you meet certain reporting thresholds, such as earning over $5,000. All rental income is taxable and must be reported. You will transfer your gross income and total deductible expenses to the appropriate lines on either Schedule C or Schedule E.

Since taxes are not typically withheld from rental income, you may need to pay estimated taxes quarterly. If you expect to owe at least $1,000 in income tax from your rental profit, the IRS requires you to prepay these taxes during the year. Estimated tax payments are generally due four times a year: April 15, June 15, September 15, and January 15 of the following year. Failure to pay sufficient estimated taxes can result in underpayment penalties.

State and Local Tax Considerations

Beyond federal income taxes, Airbnb hosts may have various tax obligations at the state and local levels. These taxes can vary significantly by location.

Many states impose their own income tax on Airbnb earnings. State income tax laws differ, and hosts should understand how their rental income is treated under their state’s tax regulations.

Transient Occupancy Taxes (TOT), also known as lodging taxes or hotel taxes, are common for short-term rentals. These taxes are typically collected at the city or county level and are levied on short-term stays. Hosts may be required to collect these taxes directly from guests and then remit them to the local tax authority. In many areas, platforms like Airbnb may collect and remit these occupancy taxes on behalf of hosts.

In some jurisdictions, short-term rentals may also be subject to sales tax. The definition of a “short-term rental” for sales tax purposes can vary, ranging from less than 30 days to up to six months, depending on state or local rules. Sales tax rates can also vary across cities, counties, and states, typically ranging from 4% to 15% of the rental income, including cleaning and other fees.

Some localities require specific business licenses or permits for short-term rental operations. Obtaining these licenses may involve fees and registration processes. These requirements help local authorities monitor short-term rental activity and ensure compliance with local regulations.