Despite being a lucrative goldmine of opportunity, with profit comes the taxman. And whilst none of us are excited about saying farewell to a portion of our hard-earned profits, the alternative can be much worse: audits, avoidable legal and accounting expenses and infuriating headaches.
Tax authorities are still grappling with how to tax the “sharing economy”, and the sand is yet to set in a way that provides a level of certainty that hosts are looking for in maximizing their profitability whilst minimizing their tax obligations.
However, gaining a basic understanding of how to navigate your tax responsibilities on Airbnb as well as understanding ways to maximize legitimate tax deductions is still within your reach.
To begin with, let’s run through some Accounting 101: Tax obligation = tax dues – tax deductions. But what are the applicable Airbnb tax dues owed and what deductions can you make for Airbnb expenses incurred?
Well, when it comes to Airbnb, your tax obligation =
Not all taxes will be applicable to everyone, and different hosts are entitled to different deductions. It is important to be familiar with each to understand your personal circumstances and tax obligations.
The following is a run through of each of these elements and the things you need to be familiar with to maximize your Airbnb earning potential.
Before diving into it, it’s important to remember that tax advice is complicated, and you should do your own due diligence when receiving advice. Airbnb hosts should consult a tax professional for assistance in reporting their income.
Tax Information you Provide to Airbnb
1. U.S. Person or Entity
Whilst not obligatory to complete or return the W-9 form to Airbnb, failure to do so will result in Airbnb withholding 28% from your payouts which they will automatically remit to the IRS. In the event that this occurs, the amount remitted will be noted on Form 1099-K (see below).
2. Non-U.S. Person with a U.S. Taxpayer ID Number
3. Non-U.S. Person without a U.S. Taxpayer ID Number
Tax Forms Provided to You From Airbnb
Depending on your account status, the taxpayer information you’ve submitted to Airbnb, and other factors, you may receive a tax form from Airbnb. Below is a summary of the different categories to whom Airbnb will issue tax forms:
1. U.S. persons who have earned over $20,000 and had 200+ reservations
2. Non-U.S. persons who have submitted a Form W-8
3. Hosts that had taxes withheld from their payouts
Local taxes go by many names. Some of the more common ones are Occupancy Tax, Lodging Tax, Room Tax, Sales Tax, Tourist Tax and Hotel Tax.
It is a tax that is assessed and levied by a local authority such as a city, state or country. Not every locality will have applicable local taxes, however many do.
Occupancy tax rates and rules vary by city, county, state, and country. They’re generally owed on the accommodation price plus any fees for other items, like cleanings or extra guests. In some places, occupancy tax is required on a per person, per night basis. There are typically long-term stay exceptions that exempt reservations over a certain number of nights. Occupancy tax is generally paid by the guest, but the obligation to remit the taxes to the government usually falls on the host.
It is therefore important to familiarize yourself with any local taxes that may exist within your area. The best way to do this is to check your city or county government website.
Where they exist, they typically apply to rentals of 30 or fewer days, and average 12% of the rental revenue. In many instances, hosts are required to register with their local city or county. Sometimes, a business licence will also be required before collecting local taxes.
Airbnb take responsibility for collecting local taxes on behalf of hosts only in specific locations. Currently, these include France, India, Mexico, Netherlands, Portugal, Switzerland and the United States (with the exception of Delaware, Georgia, Hawaii, Indiana, Iowa, Kentucky, Massachusetts, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Dakota, West Virginia and Wyoming).The Airbnb website has detailed information on the relevant local taxes it collects for each of these locations.
For these areas, Occupancy Tax amounts will appear as a line item on your listing’s public page, and you should not collect taxes separately for those jurisdictions.
If occupancy taxes are not being collected and remitted on your behalf, Airbnb will let you know if and when an occupancy tax related feature becomes available for your listing. To confirm if you listing is included in a collection area:
- Go to Your Listing
- Click on your listing
- Click on the Local laws tab at the top. If occupancy taxes are being collected and remitted on your behalf, they'll be listed on the page.
For hosts required to collect their own local taxes, it is their responsibility to collect the local tax direct from guests themselves.
These taxes may be due monthly, quarterly or yearly depending on the governing area’s requirements. In some instances, filing of taxes, even in the absence of rental income, may be required for reporting purposes once registered.
If you are required to collect local taxes and do not live within any of the jurisdictions in which Airbnb collect the occupancy tax on your behalf, it is your responsibility to collect these taxes from your guests.
Hosts have three options for doing so, and it is at the discretion of hosts as to how they wish to collect these taxes. Their options are:
- Incorporating them into their listing’s nightly price
- Adding it to a Special Offer
- Asking guests to pay it in person upon arrival
Whilst the obligation is for the guest to pay any applicable local taxes, the onus is still on the host to remit these funds to the local taxing authority (when not collected by Airbnb on the host’s behalf). Regardless of the method elected, hosts are required to inform guests of the exact amount they will be paying in local taxes prior to booking.
In some circumstances, exceptions for reservations over a certain number of nights will eliminate the need to collect any relevant local taxes. You should research and familiarize yourself with any circumstances that might apply to you.
Value Added Tax (VAT)
Valued Added Tax (or VAT) is a tax assessed on the supply of goods and services. Depending on the laws of your local jurisdiction, VAT may also be included as a tax deduction in addition to the 3% service fee.
Airbnb charges VAT on its service fees for customers from Albania, Iceland, Norway, Russia, Serbia, South Africa, Switzerland, Taiwan, the Bahamas, and the European Union. In Japan, JCT will apply, and in Australia and New Zealand, GST will apply. If you live in one of these countries (where Airbnb charge VAT on their service fees), then VAT, JCT and GST rates are calculated according to the local rate of the host’s country of residence. Hosts from all other countries are responsible for self-assessing any relevant VAT that might be owed.
The service fee presented to you by Airbnb will include VAT when applicable. VAT or GST is deducted from your payout and is based on the total host service fee for a reservation. If you change your reservation, VAT or GST adjusts to reflect any change in the service fee.
A VAT invoice is provided whenever VAT is assessed on Airbnb service fees. An invoice is finalized and issued when a reservation is accepted, and includes your information (name, address, etc.) as you entered it in your Airbnb account. Airbnb is not able to modify a VAT invoice after it has been issued. To access the VAT invoice for your reservation:
- Login to Airbnb
- In Hosting mode, scroll down and click on All reservations
- Find the relevant reservation
- Select View VAT Invoices under the Details column
- Select Host Invoice
If you have a VAT ID number registered with the European Commission, you may want to associate that number with your Airbnb account (this option is not available in Ireland). This will include your VAT ID on Airbnb VAT invoices created after the VAT ID is added.
To provide a valid VAT Information Exchange System (VIES) ID number for your account:
- Login to Airbnb
- Click on your account profile photo in the top right corner
- Select Edit Profile
- Select Add VAT ID Number in the Optional box
- Enter your VAT ID number verification information
- Click Verify
- Click Save
When your VAT ID number is successfully verified by the European Commission, you won’t be charged VAT on Airbnb’s service fees. It nonetheless remains your responsibility to self-assess whether you need to pay VAT for the use of Airbnb’s services.
If your VAT ID number can’t be verified and you determine that you do need to self-assess VAT on Airbnb’s service fees, Airbnb encourage you to consult a tax advisor for assistance.
Tax deductions for Airbnb hosts fall into one of two categories:
- Full Deductions are expenses incurred solely for the purposes of running your Airbnb operation. An example is the purchase of linen for the bed in a room used exclusively for Airbnb guests.
- Partial Deductions are expenses incurred for the shared purposes and benefits of yourself and Airbnb guests. They arise in instances where an Airbnb dwelling is either rented out on a part-time basis (with you or others living there the remainder of the time), or where only part of your space is rented out (with you or others living in the rest of the space too).
The distinction in deduction type is important as it determines the size of the deduction you’re able to claim for individual expenses.
Below are some common larger expenses you’re able to claim as full deductions:
- Airbnb Host Fees: The 3% hosting fee you pay to Airbnb is entirely deductible. To determine how much you’ve paid in host fees login to your Airbnb account, go to Account Settings > Transaction History, Click on Export to CSV (in the top right-hand corner), and sum the amounts in the Host Fee column)
- Guest amenities: These include things like toiletries, spa products or anything you’ve provided for your guests to enhance their experience
- Guest bedding and linen: Among other hosting essentials, bedding and linen for guests is entirely tax-deductible
- Food for guests: Make sure that deductions claimed for food purchased for guests is separate from food that you’ve purchased for yourself
- Mileage for conducting Airbnb activity: If you manage multiple listings, or drive your guests places as part of your service (e.g. airport pick-up’s / drop-off’s) then these expenses will be entirely deductible. Check the applicable dollar-per-mile allowance that applies to your local jurisdiction.
This list covers some full-deduction expenses, but is far from exhaustive. Other fully-deductible expenses may exist for your listing. To determine whether a particular expense qualifies as a full deduction, use the test: Was the expense for the exclusive benefit of my guests and connected to the service I provide as an Airbnb host?
Remember selecting what kind of place you are listing when first setting up your listing? This was where you specified whether you were renting out your entire home, a private room or simply some shared space.
Partial tax deductions exist where the expense incurred provides benefit to both you and your guests.
Both the amount of space you rent out of your home as well as the amount of time you rent your home for will determine just how much of a deduction you’re able to claim.
There are three scenarios where partial deductions may be claimed. Here is a summary of the formula for each:
Let’s also take a look at how to determine the partial deduction that’s applicable for each…
1. Entire Home + Part-Time Rental
When you rent out your entire place on a part-time basis and live in it for the remainder of the time.
Sample Scenario: Hosts who rent their entire home for a whole month while overseas on vacation
Formula: Expense x Proportion of Year Rented
Example: If yearly rent is $1000 and throughout the year you rented your entire place for 30 nights, then the deduction = $1000 x (30/365) = $82.19
2. Shared / Private Room + Full-Time Rental
When you rent out a shared / private room on a full-time basis but still live in your home the entire time too.
Sample Scenario: Hosts who live year-round in their home but also offer an entire room of that home to Airbnb guests year-round too
Formula: Expense x Proportion of Home Rented
Example: If yearly rent is $1000, you live in a 100 square foot apartment and offer Airbnb guests a 25 square foot space within your apartment, then the deduction = $1,000 x (25/100) = $250
3. Shared / Private Room + Part-Time Rental
When you rent out a shared / private room on a part-time basis but still live in your home the entire time too.
Sample Scenario: Hosts who list a room within their apartment on Airbnb and otherwise use that space for other purposes in the absence of hosting Airbnb guests
Formula: Expense x Proportion of Year Rented x Proportion of Home Rented
Example: If your yearly rent is $1000, you Airbnb your place for 30 nights of the year, and live in an apartment of 100 square feet of which you offer Airbnb guests a 25 square foot area within that space; then the deduction = $1,000 x (30/365) x (25/100) = $20.55
Airbnb state that tax advice is complicated, and you should do your own diligence when receiving advice. For assistance in better understanding your tax obligations and opportunities to maximize your Airbnb earning potential, you may wish to review some of the below service providers...