It’s no longer a surprise why sites like Airbnb and Craigslist became popular these days. A lot of savvy travelers have been looking for alternative accommodations when they’re out and about since hotel room rates skyrockets especially during peak summer travel season. Home-owning Americans, on the other hand, took advantage of these sites as they find it easier to process security rentals for hosts and guests or tenants. They have become mini-entrepreneurs when they found out that renting out their extra space can provide them with a decent amount of income.
Now if you’re a savvy startup landlord or part-time innkeeper, you would always want to plan in advance and determine how this could affect your tax return. Fortunately, a lot of matching travelers with hosts’ sites, made it easier on you by asking the hosts to fill out tax information. You will then just want for the appropriate corresponding Form 1099 or Form 1042-S being mailed to you at the end of the tax year. However, there are still a lot of things you may want to consider.
The rent you receive is a taxable income that must be reported to the IRS. This taxable income can be wholly or partly offset by the tax deductions you’ll be entitled to.
1. Deductible Expenses
You will be treated like a landlord who rent out properties if you rent out a room in your home. You are therefore allowed to deduct the expenses incurred from your rental business. There is just one important thing you need to remember: divide certain expenses between the property you rent out and the part you live in. Think like you actually have two separated pieces of property so you don’t get confused.
Expenses incurred from repairing a window in the room, installing carpet or drapes, painting the room, or providing your tenant with furniture (such as a bed) are just some of the things you can deduct or depreciate if applicable. If you need to pay extra homeowners’ insurance premiums because you had your room rented out, then you may deduct the full cost as operating expense. Another example is when you install a second phone line exclusively for your tenant’s use, you may also deduct it in full as a rental expense. The cost for having a first phone line, however, cannot be deducted even if your tenant uses it all the time.
2. Divide Expenses For Your Entire Home
The expenses incurred between the part your rent and the part you live in must be separated. You will also include payments for:
On the part of your home rent, you can deduct the depreciation amount.
Make sure you divide the expenses using a reasonable method - or you ask a tax professional to do the job for you. But if you choose to do it yourself, you can start by dividing the cost of sometimes such as water, based on the number of people using them. You may want to use the two most common method for dividing expenses: based on the number of rooms in your home or based on the square footage of your home.
If you’re a pass-through business owner or someone who owns any kind of business other than a regular C corporation, then you may qualify for the new pass-through tax deduction under the newly signed Tax Cuts and Jobs Act which started in 2018 and is scheduled to last through 2025. You can deduct up to 20% of your net business income from your income taxes (less if taxable income exceeds certain levels). If you're renting out a room to short-term guests and earns income from it each year, then it is qualified as a business. This means you may qualify for this significant deduction for owning and operating your room rental activity as an individual (or tenant in common) or through a partnership or LLC.
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