Contributed by: KristineS, FreeTaxUSA Agent, Tax Pro
If you’re like many Americans, you may be renting out a portion of your home on platforms such as Airbnb or VRBO for additional income. Or you may even have an entire house you rent out regularly for short-term stays or long-term rentals.
In most instances, this income is both reportable and taxable. Depending on the facts and circumstances, however, it’s considered non-taxable income, even though it’s reportable. This article explores those conditions.
What’s the 14-day rule?
Under the “14-day rule” for residential rental property, if you rent your home for 14 days or less during the year, the rental income is neither taxable nor reportable on Schedule E as rental income. Additionally, you won’t be able to deduct any expenses associated with the short-term rental period on Schedule E. This rule falls under §280A(g) of Chapter 26, United States Code. For details see IRS Publication 527, “Used as a home but rented less than 15 days.”
Why is the income reportable, but not taxable?
If you use a platform such as Airbnb, you may receive a 1099 form reporting the rental income. If you rent your personal home for 14 days or less, the income generally isn’t taxable. However, because the IRS receives a copy of the 1099, you may still need to report the form on your return showing why the income isn’t taxable.
If you choose to exclude the form from your tax return, you may get a letter from the IRS stating it’s reportable. Keeping detailed tax records including days rented, platform used (if any), personal-use days, etc., and supporting information to reply to an IRS letter showing it’s not reportable are generally all that’s needed for a response.
IRS Publication 527 states, “You aren’t required to report the rental income and rental expenses from this activity." However, if you elect to report the income in FreeTaxUSA software, you’ll need to make a second negative entry to cancel out the rental income, so it isn’t taxed. This is called a “contra income adjustment.”
To enter the income and adjustment to your tax return follow this menu path:
- Income > Business / Rental Income > Rental Income (Schedule E) > Add a Rental. Follow the prompts and add only the income, no expenses.
- Income > Uncommon Income > Other Income. Scroll down to Miscellaneous Income and answer Yes.
- Enter a description such as ‘rental income subject to Augusta Rule’ or something similar. Enter the amount as a negative amount to offset your Schedule E rental income.
What is the Augusta Rule?
The Augusta Rule name originated out of the short-term rental rule described above. It became known as a strategy used by individuals who live on or near the Augusta National Golf Club in Augusta, GA, and rent out their homes during the annual Masters Tournament.
The same rules apply. The residence must be your primary residence or vacation home. Personal use must be more than 14 days or 10% of fair rental days, whichever is greater. The rental period must be 14 days or less, and you can’t deduct expenses incurred for the rental period on Schedule E.
The residence can be your house, apartment, boat, condo, etc.
Further, rent should reflect a reasonable value by local standards. If other properties rent for $500 per night, and you rent for $1000 per night, that may be difficult to support. If the rent is much higher than comparable local rates, keep documentation showing why the higher rate is reasonable.
State reporting requirements may be different, so check your state’s rules.
Conclusion
If you rent your personal residence 14 days or less, the income isn’t taxable on your federal tax return. However, if you’re issued a1099 form for the rental period, you’ll need to decide whether to report the form and offset the income or keep records showing why the income qualifies for the 14-day rental exception.