Part-time landlords: Don't forget to give Uncle Sam a cut

  • The short-term rental market is expected to reach $36 billion by the end of 2018.
  • If you rent for 14 days or less out of the year, you're off the hook for taxes.
  • Above that threshold? Start tallying up your expenses to reduce the taxable amount.

If you're among the growing ranks of part-time landlords — those who rent out a room or their whole house for short stays — don't forget Uncle Sam might be due a cut.

With the growth of home-sharing sites like Airbnb, HomeAway and VRBO, the demand for short-term rental options has converted some homeowners into part-time hosts. While the exact number of homeowners who fit this profile are hard to come by, there is evidence that travelers are increasingly choosing this kind of lodging option.

In 2015, about a third of U.S. travelers stayed in privately owned accommodations, up from 10 percent in 2011, according to industry researcher Phocuswright.

AirBNB landlord, Shaun Johnson, (L) talks with his tennant, Taylor Valencia of San Francisco, at his property in NE Washington. He rents properties via the website instead of to long-term tenants.
Jonathan Newton | The Washington Post | Getty Images
AirBNB landlord, Shaun Johnson, (L) talks with his tennant, Taylor Valencia of San Francisco, at his property in NE Washington. He rents properties via the website instead of to long-term tenants.

Last year, such rentals grew by 11 percent year over year, nearly twice as fast as the total U.S. travel market, Phocuswright research shows. By the end of 2018, the firm estimates, the private-rental market will be worth $36.6 billion, up from $23 billion in 2012.

But it's not always easy (or legal) to become a part-time landlord. Various cities have been taking steps to better regulate the short-term rental market. Depending on where you live, you might need to be licensed, registered or meet some other locally imposed requirement.

Tax rules for part-time landlords

To figure out whether you need to report income from renting — whether in your primary home or your vacation home — count up the days in the calendar year that you rented out the space.

"If you rent for 14 days or less, the rental income you earn is tax-free," said Stephen Fishman, author of "Tax Guide for Short-Term Rentals."

"In that event, you don't get any deductions, but you also don't pay tax on the income," he said.

If your rental days are above the 14-day threshold, you will need to report the rental income. But the good news is, you also get to reduce the taxable amount by deducting a variety of expenses related to it.

"If you ever get audited, they can check your bank records and other records. The evidence is there." -Stephen Fishman, Author of "Tax Guide for Short-Term Rentals"

Costs like local licensing, fees you pay to online platforms, advertising and marketing are all associated business costs that could be deductible. Other expenses — repairs, mortgage interest, property taxes, utilities — are deductible on a prorated basis tied to the number of days you rented your home out.

For example, if you rent your full house out for 20 percent of the year, or 73 days, you can deduct 20 percent of expenses related to the house (i.e., utilities).

If you rent just a room, the same expenses are deductible, but to a lesser degree. If the room takes up 25 percent of the space in your home, you could deduct 25 percent of expenses allocated to those days. (Using the example above: You could deduct a quarter of that 20 percent total.)

It's worth noting that if a provision in the House tax-overhaul bill makes it into final legislation that Congress is working toward, renting might be the only way to take advantage of the mortgage interest deduction.

vacation home summer home beach house
Astronaut Images | Getty Images

Basically, because the standard deduction would be doubled under the tax bill, fewer taxpayers would itemize, which is the only way to take use to the deduction for mortgage interest. If you rent, however, the interest is treated as a business expense — no itemizing necessary.

Current law also allows you to deduct the interest you pay on mortgage debt up to $1 million (and $100,000 of home equity debt), whether it's on your first or second home.

A provision included in the House-approved tax bill would limit the write-off to mortgage interest on your first home. If that provision makes it into final legislation, renting would be the only way to get a deduction for mortgage interest on your second home.

Fishman cautions that while it might be tempting to avoid reporting your rental income to the Internal Revenue Service, you're breaking the law if you don't.

"If you ever get audited, they can check your bank records and other records," Fishman said. "The evidence is there."

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