Many taxpayers, from short-term vacation hosts to long-term landlords, often wonder how to handle the income from renting their home or investment property. They may think their rental losses can be treated as a business expense, allowing them to file a Schedule C and reduce their taxable income.
However, this isn’t always the case. To report your rental property as a business, the IRS requires that you “materially participate” in managing the property. They have specific tests to determine if your activity is passive or active.
❗Your Home is (Probably) Not a Business
If you rent your home to short-term rentals for more than 14 calendar days, you will be required to report this rental income on your 1040 tax return.
If you used a rental app or website as an agent for the rental, you may receive a Form 1099-K. Be aware that the amount you report on the 1099-K form is the gross amount and is exclusive of any refunds, adjustments, or service fees that may have been charged.
The good news is that these charges may be used as deductions on your tax return unless they are deemed to be non-taxable exceptions. Refunds, service fees, and adjustments are not included in the gross amount. These differences will be accounted for as deductions on your tax return.
The devil in all this is in the details. High-net-worth individuals looking to find big write-offs from renting their home will discover there are some complex conditions their rental activities must meet to be a deductible opportunity.
💡Understanding Your Tax Return and Rental Property
Rental income is reported based on the activities associated with your property. For short-term rentals, there are typically three categories:
- ✅ Non-taxable rentals
- ✅ Schedule C rentals
- ✅ Schedule E rentals (Most rentals fall under this category).
Let’s break it down:
❓Did you stay at the property this year?
- If not: Did you provide significant services to your renters?
- If not: File a Schedule E.
- If yes: File a Schedule C.
- If yes: Was the property rented for 14 or more days?
📌 Non-Taxable Rentals
Sometimes, people rent out their home for just a few days. In this case, your rental might not be taxable, even if you earned a significant amount. If the property was used as your residence and rented for less than 14 days, the rental income isn’t subject to tax—this is known as the “Augusta Rule.” However, property taxes and mortgage interest can still be deducted on Schedule A.
📌 Schedule C Rentals
Owners who provide what the IRS considers substantial services for guests in their rental qualify to report their income and deductions as a Schedule C business. However, as a Schedule C business, the taxable profits derived from this rental activity will also be subject to self-employment tax.
📌 Schedule E Rentals
When the property owner does not provide what the IRS determines to be substantial services to their rental guests, rental income should be reported on Schedule E on their 1040. Taxable profits from a Schedule E are not subject to self-employment tax, and losses are limited to higher income earners based on the IRS limits for adjusted gross income.
Need Help?
If you’re still unsure about how to report rental income or maximize deductions, we’re here to help. Give us a call today, and we’ll make sure you’re on the right path to optimizing your rental property’s tax impact.