The real estate market is tough in general right now. With less loans being dealt out and a shortage of homes for sale, both buyers and sellers are working hard to get what they want.
And it looks like there’s a big change with how agents are paid that’s coming which could save sellers some money but cause first-time homebuyers to struggle even more.
If you’re deciding to keep your Southern Illinois home instead of selling right now, you could make some extra cash from others staying in your home via Airbnb or VRBO.
Having the option to stay in a house over a hotel is an appealing one for travelers, especially those with families or who want access to a kitchen with their short term rentals. And it’s an attractive, income-boosting idea for a lot of people right now. Even though it looks like there’s trouble on the horizon for those who’ve built short-term rental mini empires, it could still be a viable option for you.
If you’ve been thinking of transforming your space into a short term rental for the holidays, besides the obvious evaluations for making such a move (deciding if it’s a good investment, if you have the cash on hand to prepare your house for the endeavor), it’s helpful to know what that means tax-wise.
Let’s look at what you’ll need to consider with short term rentals.
Before Turning Southern Illinois Homes Into Short Term Rentals
“Landlords grow rich in their sleep without working, risking or economizing.” – John Stuart Mill
Airbnb-ing your home can be a lucrative idea, especially during the holiday season when everyone is searching for homey accommodations for their holiday travels. It’s just cozier to stay in a house. And for you, hosting a short term rental could mean a boost for your income that you really need right now.
But before you jump into that kind of commitment, you’ll want to consider how it affects your taxes.
Any income you get from short term rentals is taxable, but often you can offset it with eligible property expenses. For instance, if you earn $12,000 in rent but have $10,000 in expenses, your taxable profit is $2,000. If your expenses exceed your income, you may deduct up to $25,000 from your regular income, based on your total income. If your combined income is over $100,000 for a married couple filing jointly ($50,000 for singles), the deduction gradually decreases and phases out at $150,000 ($75,000 for singles).
If it ends up that you can’t use the full deduction in one year, you can carry forward the losses until your property generates positive income or your income falls below the set limits.
You can also take deductions for short term rentals including:
Direct expenses. Costs like utilities, repairs, maintenance, advertising and cleaning are fully deductible.
Indirect expenses. You can proportionally deduct shared expenses, such as mortgage interest and property taxes.
Depreciation. This lets you deduct wear and tear on your property over time.
Home office deduction. If part of your home is used solely for rental management, it may qualify for a deduction.
*Note that a portion of your mortgage payment that goes toward the principal isn’t deductible. Renovation costs are typically capitalized and depreciated over time. Residential properties depreciate over 27.5 years, while commercial rentals follow a 39-year schedule.
There are some added responsibilities and limitations with regard to the IRS that come with renting your property as well:
- Record-keeping: You’ll need to keep careful track of income and expenses. Hold onto those receipts and invoices to support deductions and label them accordingly.
- Potential tax liability: Income from rentals could potentially push you into a higher tax bracket. Regular interactions with the Bills Tax Service team can help navigate this efficiently.
- Staying in your home: Personal use of the property can’t exceed 14 days or 10% of the total days it’s rented out during the year, whichever is greater. If you go over the 14-day/10% limit, you can still deduct rental-related expenses, but only up to the amount of your rental income.
- Passive activity loss rules: There are also potential limits on deducting rental property losses. These rules can restrict how much you can offset other income — depending on your involvement in rental activities.
There are definitely some nuances to consider before renting your Centralia house out to travelers. It could be a great move for you, but it will require some thoughtful planning. I’m here to help you think through this decision and help you navigate your IRS duties if you decide to make a listing.
Keeping you tax nimble,
Alan Newcomb