My Client Tripled His Income Using Airbnb: Here’s What He Should Know About Taxes

25

Some of you may know this already, but for those of you who do not, I have quite a few rental properties in “Sin City” Las Vegas. I grew up there, and I still have lots of friends and family who live there. Once of the perks of investing in Vegas for me is the ability to write off some of my travel costs when I go back to Vegas as part of my investment expenses against my rental income.

My Vegas rentals have performed well for me in the past, and odds are that I will continue to invest in that market. Why, you may ask? Well, for me personally, the answers are simple:

  • I know the area well.
  • The returns meet my investment criteria.
  • I have a team in place there to assist me.
  • I get to write off my Vegas trips when I go back to visit my mom!

Now, I know some of you may completely disagree with me. In fact, I was speaking with Jeff Brown just recently when he told me that he thinks Vegas is a terrible place to invest. Whether you feel Vegas is a good market or not, one undeniable thing about Vegas is that it is a major travel destination. Even though all of my properties there are the traditional bread and butter 3-bedroom, 2-bath long term rentals, I did recently become aware that there are better ways to rent out my Vegas properties.

Related: The Upsides & Downsides of Airbnb: A Landlord’s Perspective

How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties

This is the dream right? Going from zero to 10+ rental properties, providing stable cash flow and long-term wealth for you and your family, and building a scalable business model to boot! Learn how this investor did just that, in this exclusive story featured on BiggerPockets!

Click Here For Your Free eBook

Using Vacation Rental Sites

I was speaking with a client of mine, Ron, last week who also happens to own a few properties in Las Vegas. Ron’s property was built in the early ‘80s and in Vegas standards, it is often considered an “old” property. In the past, Ron told me about some of the hurdles he had in terms of vacancies and low rents for this particular property. This is why I was so surprised when Ron called to tell me that he needed to come in to get some tax strategies in place in order to protect himself from taxes on the income his Vegas property was generating.

What I learned from Ron that day during our meeting was that he made a shift in how he was renting out his Vegas rental this year, and this change will likely double or even triple his income. What was the change? He turned his property from a regular rental into a short term rental on Airbnb. For those of you who are not familiar with Airbnb, it is an online service that helps you market a property for short term rentals similar to a hotel. Rental days may be a long as several months or as short as one day.

For Ron, who had traditionally rented out his property to long term tenants, the change in marketing as a short term rental has paid off significantly so far. When I spoke with Ron in June, he informed me that the money he made so far in 2015 already surpassed the rents that he earned in all of 2014. What a great way to put a property into its best and highest use, right?

Just then, I started to realize that Ron was not alone. In the last year or two, I have had dozens of clients turn their traditional rentals into these short term rentals. In fact, I have a handful of clients who rent out rooms in their primary homes on a short term basis using online sites like Airbnb. As with anything, there are pros and cons to this, of course.

Tax Implications

I personally have not rented any of my properties out using this method so I am not qualified to talk about what those pros and cons are from an investor’s perspective. There are, however, some potentially significant tax items to watch out for if you plan on doing short term rentals like these. Here are a few pointers to making sure that you minimize taxes on your rental income:

  • To ensure that you get the best tax treatment as an investment property, be sure to plan strategically so that your average number of stays per customer is greater than 7. This can help you to save up to 15% in self-employment taxes.
  • Short term rentals are just like any other rentals when it comes to tax deductions, and you can still take depreciation, interest, taxes and repair costs. You may have quite a bit of cleaning costs between the short term tenants, so be sure to track these tax deductible items as well.
  • If you are using a company like Airbnb or any other online service, they may issue you a 1099 at the end of the year, just like most management companies. Make sure you match that up with your records to ensure that there are no errors and to minimize audit risk.
  • Unlike regular rental properties, most short term rentals are furnished properties. If you purchased furniture or equipment for your property, make sure that you are taking tax deductions for that, too.
  • Food and other supplies may be tax deductible as well. If you provide coffee, tea or toilet paper, keep those receipts to support your tax write off!

Related: AirBnB vs. Traditional Rental Income: A Creative Way for Investors to Cash Flow in Expensive Cities

As you can see, there are some slight differences between a regular rental and a short term rental. If you are getting into the short term rental business, it may make sense to sit down with your tax advisor to get a plan in place to reduce your taxes, especially if you anticipate a significant amount of rental income in the future. For now, I do not have any of my properties as short term rentals, but odds are that I will be trying this out for myself in the near future. If and when that happens, you can count on me to share my experience!

Investors: Have you tried renting out any of your properties with Airbnb (or a similar service)? What has your experience been?

Let me know with a comment!

About Author

Amanda Han

Amanda Han of Keystone CPA is a tax strategist who specializes in creating cutting-edge tax saving strategies for real estate investors. As real estate investors herself, Amanda has an in-depth understanding of the various aspects of investing including taxation, self-directed investing, entity structuring, and money-raising.

25 Comments

  1. Amanda Hensley

    I have a question: You wrote “To ensure that you get the best tax treatment as an investment property, be sure to plan strategically so that your average number of stays per customer is greater than 7. This can help you to save up to 15% in self-employment taxes.”

    Do you mean that the same customer needs to stay more than 7 times? Or that you need 7 or more different clients staying the home per year…

    Can you elaborate on how that relates to self-employment taxes? I’m not following…

    • This means the average stay per person. So if you only had 2 guests for the year and the first one stays 1 night and the second one stays 15 nights, then the average nights per person was 8 nights. Hope this helps =)

  2. Ally H.

    Does the apply above if you rent out a bedroom in your primary home on AirBnB? If I can depreciate the property, how do I calculate what percentage to depreciate (by bedrooms? by square feet?)? Thank you!

  3. John Thedford

    I too am curious about the “stays per customer is great than 7” comment. Also, one comment: collecting taxes. Aren’t there sales taxes or “guest taxes” or something of that nature with these short term rentals that have to be collected and remitted to the state? Does Airbnb collect and remit them? Thanks for the article.

  4. I have 2 vacation rental properties (and plan to invest in more) that initially started out as fix and flip properties. After some due diligence, I have found that the income stream and tax write offs will far out way any tax concerns. As far as dealing with the turn over rate and concerns about damage to your property, I have found that most folks are using the home for a place to lay their head down at night as they are out and about for the most part. Maximize the home’s hosting availability by having enough space for at least 10 people to maximize occupancy. This can be accomplished very easily with bunkbeds and trundle beds. In addition, have house rules and make sure the potential guests have read your house rules prior to accepting their reservation. If there are going to be children under the age of 9 staying in your home, have a very direct conversation about children with your guest prior to the reservation as far as the potential additional cleaning fee request if the rules are not followed (I mention in the house rules on Airbnb that if you have children under the age of 9 that you must let me know for a quick parent to parent discussion prior to reservation). Lastly, remember, this is your home and you make the rules, but in the same breath, it’s all about psychology 101 … shower your guests with conversation about their needs, get their comments posted and you’ll be known as a top host.

  5. Octavio Goncalves

    Thank you Amanda for your excellent explanation on how short term rentals can increase profits. I have been utilizing this strategy for a few years and it has been more lucrative as compared to longterm rentals. An additional point I would make is to check with your states tax laws to learn at what time frame the hotel tax would need to be charged. In some states, including Connecticut, any period less than 30 days is subject to the hotel tax. Lastly, some towns have limitations on short term rental and can levy their own taxes on these rentals.

  6. Aimee B.

    Something else to consider tax-wise is that many municipalities impose tourism and transient occupancy taxes for landlords of short term rentals. There may also be additional regulations based on fire code, ADA compliance and other items not typically applied to residences but become activated when your property is classified as a ‘hotel’.

  7. Neil Henderson

    My wife and I very happily run an AirBnB listing out of the casita at the front of our house here in Las Vegas. I looked into purchasing a few more properties to set them up as short-term rentals but got spooked by the legal grey area they inhabit here in the Las Vegas Valley. Especially if the property is viewed as a “party house.”

    Oddly enough, that quest for information brought me here to Bigger Pockets and towards buy and hold rentals.

  8. James K.

    Hi Amanda,

    I want to include that this self employment tax rate of 15.3% is comprised of 12.4% for Social security and 2.9% for medicare. But if your w-2 income is $118,500 (for 2015) or above, you only have to pay 2.9% on your Airbnb income.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php