Deduction and Depreciation of AirBnB rental

3 Replies

So I am about to put the master bedroom (with bath) in my home (of 3 beds 2 baths) to Airbnb and I am confused about all the tax-related stuffs. Let's say my home is 1500sqf on a land of 6000sqf, and the whole master bedroom is 300sqf. 

1. I believe that I can write off the depreciation part of the room but how is it calculated? Is it going to be prorated based on the area of the room vs. the whole house?

2. Can I still claim the whole mortgage interests and property tax as deductible given that I take depreciation write-off of the Airbnb room? I read somewhere people say that I have to prorate for the part of the house that I am living in (i.e., exclude the Airbnb room). Some others say I can still claim the whole thing. 

3. Is all expense for the Airbnb room deductible and what are the exceptions? I bought multiple items for the room: small fridge, microwave, curtains, mattress, bed, nightstand, working chair and table, etc. 

4. I am thinking of hiring a contractor to replace the window of the Airbnb room with a sliding door, giving guests a private entrance. Material cost of the door is $800. There's a contractor who only takes cash can do the work for $1000. My understanding is the material cost of $800 is deductible, but I'm not sure about the $1000 labor cost?

5. Since I will start renting this October, pretty sure that the expense will exceed the income. What would happen to my deduction in this case?

Thank you

If personal use of the rental property, first determine if the rental property is considered home, in your case it is your home.

What is the catch? If the dwelling unit is considered home, then the amount of rental expense you can deduct is limited.You cannot report rental expenses that are more than your gross rental income, although the losses can be carried forwarded.

Rules:

The dwelling unit is considered home if you use a unit for the personal purpose more than the greater of:

1.14 days or

2.10% of the today days it rented to other at fair market value.

If you meet the criteria above, which you will as this is your house, your property is considered home there are two scenarios:

1.Home rented for less than 15 days: Do not report any income or expense. The mortgage interest, property taxes, and any qualified casualty loss will be reported on Schedule A as an itemized deduction.

2.Home rented for more than 15 days:

A.Income: report all the rental income

B.Expense: the expenses must be divided between rental use and personal use. The deductible rental expenses cannot be more than gross rental income. If the portion of the house is rented as you have, the expenses are divided

1.Based on the number of days of the personal use and rental use and

2.Based on the portion of the house that is rental vs house

Your questions:

1. I believe that I can write off the depreciation part of the room but how is it calculated? Is it going to be prorated based on the area of the room vs. the whole house?

  • - This one is of the preferred methods.

2. Can I still claim the whole mortgage interests and property tax as deductible given that I take depreciation write-off of the Airbnb room? I read somewhere people say that I have to prorate for the part of the house that I am living in (i.e., exclude the Airbnb room). Some others say I can still claim the whole thing.

- If you don’t take the deduction as a rental expense, then you can take the whole deduction on Schedule A. If not, you have to divide between the rental and personal.

3. Is all expense for the Airbnb room deductible and what are the exceptions? I bought multiple items for the room: small fridge, microwave, curtains, mattress, bed, nightstand, working chair, and table, etc.

- If all of these are directly related to Airbnb and will not be used for the personal purpose, you can deduct the whole thing.

4. I am thinking of hiring a contractor to replace the window of the Airbnb room with a sliding door, giving guests a private entrance. Material cost of the door is $800. There's a contractor who only takes cash can do the work for $1000. My understanding is the material cost of $800 is deductible, but I'm not sure about the $1000 labor cost?

-You need to issue 1099 to whoever you pay more than 600 if you want to take the deduction. If you pay cash and the contractor is not reporting the income, you are not supposed to deduct it. IRS expects someone to pay the taxes on that money if it is deducted. if contrator doesnot report it, it is not allowed and you will end up paying taxes on it becuase you did not get to deduct it. 

5. Since I will start renting this October, pretty sure that the expense will exceed the income. What would happen to my deduction in this case?

- If your deduction is greater than income you have loss, and loss can offset your other income depending on how you conduct Airbnb. It can be either passive (not subject to Self-Employment tax) or ordinary income (Subject to Self-employment tax) 

Thanks @Ashish Acharya , wish I can do multiple votes :)

Another question though: since the life of many items I bought (mattress, fridge, ...) should be greater than 1 year, do I treat them as CapEx?

@Chris Penny , even if the life of the items you bought are greater than a year, you can deduct them under tax safe harbor rule, de minimis rule. 

You can deduct items below 2500 as an expense, you do not have to capitalize them. 

The safe harbor applies to amounts paid during the tax year to acquire or produce what the regs call a “unit of property” (UOP), you must meet these requirements:

  • (1) at the beginning of the tax year, the taxpayer has written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount (which will be 2500 for you), or with an economic useful life of 12 months or less;.
  • (2) the taxpayer treats the amount paid for the property as an expense on its books and records in accordance with its accounting procedures. ( do this on your bookkeeping software or whatever you utilize)
  • (3) the amount paid for the UOP doesn't exceed $2,500. as substantiated by the invoice
  • Note: The cost for the Unit of Property includes l additional costs (for example, delivery fees, installation services, or similar costs) if these additional costs are included on the same invoice with the tangible property. 

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