Airbnb rental income taxation

Airbnb is not a cost sharing arrangement. The short term rental fee is unrelated to splitting costs (that is, the daily rental rate isn't 1/30 of the monthly cost of the space occupied). Airbnb is getting a fee for its services. Simply put, it's a business activity.

Additionally, the tax treatment of short-term rentals and long-term rentals is different. Short-term rentals are Schedule C income and potentially subject to SE tax, not Schedule E income.

Ira Smilovitz

Ira is referencing the 7 day or less rule. If the average rental period during the tax year is 7 days or less, you do not have a rental activity. The activity gets reported on Schedule C.

I thought if the rental activity was 14 days or less in a year, there were no tax consequences no matter how much money changed hands.

These are two separate issues. If the total rental is 14 days or less and the property is used as a residence (not necessarily as a primary residence) by the owner for more than 14 days, then you don't have to report the income. If the total rental is more than 14 days in the year but the average rental period is less than 7 days, you don't have a Schedule E rental activity, you have a Schedule C business. It's not quite as simple as this, but that's the general rule.

Ira Smilovitz

Thanks for the clarification, Ira. I should have noticed the difference.

Can someone point to the source of the rule that moves a rental to Schedule C, and would subject the rental income (or loss, I guess) to SE tax, when the average tenancy is seven days or less? Thanks.

The temporary regulations for Section 469 of the IRC and various court cases that have agreed with those regs.

IRC Section 1.469-9(b)(3) Reg. § 1.469-1T(e)(3)(ii) and Reg. § 1.469-5T(a)

Todd and Pamela Bailey v. Commissioner, TC Summary Opinion 2011-22 (3/2/11) Hoskins vs Comm'r, T.C. Memo. 2013-36

Alan- does any of those cites address the self-employment tax question? I've read tham all and can't find a thing in there about the SE tax. They're all about Section 469 and the passive loss limitations.

They tell you that your income and expense are reported as a business on Schedule C. As such, your net profit would be subject to SE tax.

Elaborating on what Alan just wrote, you (lotax) are looking at this backwards. Reporting rental income via Schedule E is an exception to the general rules regarding business income. The IRS and the courts have determined that short-term rentals don't meet the conditions necessary for the special treatment of rental income.

Ira Smilovitz

How have the IRS and the courts chosen to disregard IRC section 1402(a), as follows?

"(a) Net earnings from self-employment The term ?net earnings from self-employment? means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, ... except that in computing such gross income and deductions ... - (1) **there shall be excluded rentals from real estate and from personal property leased with the real estate** ... together with the deductions attributable thereto, unless such rentals are received in the course of a trade or business as a real estate dealer ...." [**emphasis** added]

I think the IRS and the courts have looked to the *services* provided with the rental real estate, and *not* the length of the rentals, in applying SE tax to rental income from rents of a week or less.

All the cites to Section 469 and its regs apply only in the context of the passive activity rules and have nothing to do with self-employment tax.

Section 469 defines passive activities and generally includes rental activities as passive. Whether short-term rentals are "rental activities" under the Code is the key point.

Reg. 1.469-4(b) defines types of activities:

(b) Definitions. The following definitions apply for purposes of this section? (1) Trade or business activities. Trade or business activities are activities, other than rental activities or activities that are treated under § 1.469-1T(e)(3)(vi)(B) as incidental to an activity of holding property for investment, that? (i) Involve the conduct of a trade or business (within the meaning of section 162); (ii) Are conducted in anticipation of the commencement of a trade or business; or (iii) Involve research or experimental expenditures that are deductible under section 174 (or would be deductible if the taxpayer adopted the method described in section 174(a)). (2) Rental activities. Rental activities are activities that constitute rental activities within the meaning of § 1.469-1T(e)(3).

The problem with your assertion comes at the end of subparagraph (2) above.

Reg. 1.469-1T(e)(3)(ii) carves out six exceptions which make rental a arrangements not rental activities:

(ii) Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year? (A) The average period of customer use for such property is seven days or less; (B) The average period of customer use for such property is 30 days or less, and significant personal services (within the meaning of paragraph (e)(3)(iv) of this section) are provided by or on behalf of the owner of the property in connection with making the property available for use by customers; (C) Extraordinary personal services (within the meaning of paragraph (e)(3)(v) of this section) are provided by or on behalf of the owner of the property in connection with making such property available for use by customers (without regard to the average period of customer use); (D) The rental of such property is treated as incidental to a nonrental activity of the taxpayer under paragraph (e)(3)(vi) of this section; (E) The taxpayer customarily makes the property available during defined business hours for nonexclusive use by various customers; or (F) The provision of the property for use in an activity conducted by a partnership, S corporation, or joint venture in which the taxpayer owns an interest is not a rental activity under paragraph (e)(3)(vii) of this section.

Going back to IRC 469(l), the Secretary has the authority to issue Regs that define what is (not) a passive activity (among other things).

That leaves you with "trade or business" (defined as any activity carried on for the production of income from selling goods or performing services) and income from conducting a trade or business is subject to SE tax.

Ira Smilovitz

You may be right. It takes a lot of doing to be considered by the IRS and the courts to be in the "Trade or Business" of rentals.

Did you see the place where the quoted Reg. 1.469-4(b) says "...for purposes of this section"? These regulations apply to Section 469, but they don't apply to Section 1402.

Where is the definition of "rentals from real estate" that applies to Section 1402? If this distinction (definition in 1.469-4(b) vs. your "plain text" reading) is important to you personally (or for a client you represent), feel free to challenge the IRS on this. I am comfortable with the determination that the various parts of the 1.469 regs make short term rentals a "trade or business" for the purpose of SE Tax.

Ira Smilovitz

Here's a quote from IRS's Publication 334. If the 7-days (or less) rule really applied to the rental of real estate, don't you think the IRS would include that in this paragraph?

"If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc., who provides services (maid services, etc.) for guests, report the rental income and expenses on Schedule C or C-EZ. If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. For more information, see Pub. 527, Residential Rental Property (Including Rental of Vacation Homes)."

At the risk of redundancy, I will repeat: "If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E." There is no mention at all of the length of the average lease. The 7-day test is all about passive activity, and not at all about self-employment tax.

Did you read Hoskins?

"The parties agree that in 2006 Midnight #1 was not rental real estate and that in 2007 both Midnight #1 and Midnight #2 were not rental real estate because the average period of customer use was seven days or less during those periods. Thus, these properties are not rental activities for purposes of section 469(c)(2) and are considered a trade or business or an income-producing activity. See Bailey v. Commissioner, T.C. Memo. 2001-296."

Don't Airbnb landlords provide services, i.e. clean up the place, wash the linens, make the bed, etc. in order to make it ready for the next guest?

This is the easiest to explain. First, IRS Publications have no authority. They make no representation that they contain all the information relevant to a given situation. Second, the IRS could (and probably does) consider an Airbnb rental to be "a hotel, motel, etc."

Ira Smilovitz