With the rise of platforms like Airbnb, Vrbo, and other short-term rental services, many homeowners are exploring the idea of renting out a room or a portion of their home to earn extra income. While the potential for generating additional cash flow is appealing, it also introduces various tax, legal, and financial implications that you must understand to stay compliant and optimize your earnings. This blog explores what happens when you rent out part of your home, how it affects your taxes, what deductions you can claim, and what legal issues you should consider.
1. Rental Income Is Generally Taxable
If you rent out any part of your home—whether it’s a basement, spare bedroom, guesthouse, or even your couch—you are typically required to report the income you earn. The IRS considers rental income as taxable, even if you only rent out occasionally or part-time.
Income earned from short-term rentals like Airbnb must be reported on your federal income tax return, typically on Schedule E (Form 1040), Supplemental Income and Loss. If you’re running the rental more like a business, you might have to file Schedule C instead.
2. The 14-Day Rule Exception
There is one important exception: the IRS 14-day rule. If you rent out your home (or part of it) for fewer than 15 days during the year and use it as your personal residence for more than 14 days, the income is not taxable. You don’t have to report it, and you can’t deduct any rental-related expenses.
This rule is ideal for homeowners who host guests for a short period, such as during festivals, conferences, or large events, and want to avoid tax implications.
3. Reporting Rental Income and Expenses
When renting out part of your home, you must report the income you earn and the portion of expenses related to the rental activity. This includes:
- Gross rental income from Airbnb or other platforms
- Cleaning fees charged to guests
- Any reimbursements from guests for utilities, repairs, or other services
You can deduct allowable expenses proportional to the part of your home used for renting. Common deductible expenses include:
- Mortgage interest
- Real estate taxes
- Utilities (electricity, water, gas)
- Homeowners insurance
- Maintenance and repairs for the rental portion
- Depreciation of the rental area
- Cleaning and supplies
4. How to Allocate Expenses Between Personal and Rental Use
You must separate expenses related to personal use of your home from those related to the rental activity. This is done based on either:
- Square Footage: If you’re renting out a room, you can calculate the percentage of your home’s total square footage used for rental.
- Time-Based Use: If you rent out a portion of your home for part of the year, calculate expenses proportionally based on rental days vs. total days in the year.
For example, if you rent out 25% of your home for 6 months, you can deduct 25% of applicable annual expenses for that time period.
5. Depreciation Rules
You can depreciate the portion of your home used for rental purposes over a period of 27.5 years. Only the structure is depreciable—land is not. To calculate depreciation, you’ll need to allocate the home’s basis (purchase price + improvements) to the rental portion and apply IRS depreciation methods.
Depreciation is a powerful tax tool but must be recaptured when you sell the property. The IRS may tax a portion of your gain as depreciation recapture, typically at a 25% rate.
6. Self-Employment Tax Considerations
If you provide substantial services to guests—such as daily cleaning, breakfast, or guided tours—your rental activity may be considered a business. In that case, you may have to report income on Schedule C and pay self-employment tax in addition to income tax.
Self-employment tax covers Social Security and Medicare contributions and currently applies at a rate of 15.3%. You can deduct the employer portion of this tax (7.65%) as an adjustment to income.
7. 1099-K and Tax Reporting Requirements
Airbnb and other platforms must issue you a Form 1099-K if you earn $600 or more annually from their platform. This information is also sent to the IRS, so ensure your reported income matches or exceeds what the IRS receives.
Even if you don’t receive a 1099, you are still legally required to report all income.
8. Local Laws, Licenses, and Zoning Rules
Beyond federal tax obligations, short-term rental hosts must comply with local laws and regulations. These often include:
- Obtaining a business or short-term rental license
- Complying with zoning laws or HOA restrictions
- Paying local occupancy taxes or tourism levies
- Adhering to health and safety standards
Failure to follow local rules can result in fines, lawsuits, or being barred from operating a rental altogether. Always check with your city or county for specific requirements.
9. Homeowners Insurance and Liability
Your standard homeowners insurance policy may not cover short-term rentals. If something goes wrong—a fire, injury, or property damage—while a guest is staying, you could be personally liable.
Many platforms offer host protection programs (Airbnb provides up to $1 million in liability coverage), but this coverage may have exclusions. It’s wise to speak to your insurance provider about rider policies or dedicated landlord insurance for added protection.
10. State and Local Taxes
Many states and municipalities require short-term rental operators to collect and remit:
- Sales tax
- Lodging tax or transient occupancy tax
- Tourism or hospitality fees
Some platforms like Airbnb collect and remit these taxes on behalf of hosts in certain locations. However, in other areas, it is your responsibility. Check with your local Department of Revenue or tax office to ensure compliance.
11. Recordkeeping and Documentation
Accurate recordkeeping is essential when renting out part of your home. You should maintain:
- Detailed logs of rental dates and occupancy
- Receipts and invoices for all expenses
- Documentation of services provided to guests
- Copies of licenses and permits
- Copies of Form 1099-K or payment summaries from platforms
Good records will help you accurately file your taxes, support any deductions, and protect you in the event of an audit.
12. Impact on Home Sale and Capital Gains Exclusion
When you sell your home, you may qualify for the primary residence capital gains exclusion—$250,000 ($500,000 for married couples filing jointly) of gain can be excluded from taxes. However, renting out part of your home can reduce the amount of gain eligible for exclusion.
If you depreciated the rented portion, you must recapture that depreciation. Also, if the rental portion is considered separate from your primary residence (e.g., a completely separate entrance and amenities), it may not qualify for the exclusion.
Conclusion
Renting out part of your home through Airbnb or other short-term rental platforms can be a great source of extra income, but it comes with responsibilities. You must understand and follow federal tax rules, track your income and expenses, and comply with local laws and regulations. Proper planning, diligent recordkeeping, and awareness of your obligations can help you maximize your earnings while staying on the right side of the law.
If you’re uncertain about your tax situation or legal responsibilities, consider consulting with a qualified tax advisor or attorney who specializes in real estate and short-term rentals. Being informed is the best way to turn your home into a compliant and profitable asset.
