Before you rent out room, brush up on tax rules

So you have a house to rent — or maybe just a room. Or perhaps you’d like to pick up passengers in your car working for Uber or Lyft.

Pursuing these types of business activities can be great sources of additional income. But there are drawbacks too, including those involving taxes.

There are several tricky tax rules to beware, especially if you want to lease your home or part of it: A guide prepared for Airbnb landlords by accounting firm Ernst & Young runs 28 pages.

Yet plenty of the more than 2.5 million people now estimated to be part of the “shared economy” aren’t familiar with the rules, especially when they involve renting out part of a home.

“Many individuals might take on these new jobs completely unaware (of the tax obligations),” said Nina Olson, the National Taxpayer Advocate, in congressional testimony last year. The rules can be more confusing for people who pursue such activities as part-time, secondary sources of income, she said.

In a poll conducted by the National Association of the Self-Employed, roughly one-third of survey participants didn’t realize they might need to file quarterly estimated payments, and roughly onethird didn’t know what types of tax records to maintain.

Yet more people are engaging in these activities. In one recent example, Airbnb said the nearly 4,700 Phoenix-area residents who opened their homes to Cactus League spring training guests this year and used the company’s services earned $2,350 on average over the six-week exhibition baseball season.

Here are some basic tax tips to heed, focusing on part-time or partial home rentals:

Income is generally taxable

The money you earn from shared-economy pursuits typically is taxable and must be reported, even if you’re running things as a part-time or sideline business. Income also is taxable, even if you collect the proceeds in cash and don’t receive any Form 1099s.

One exception involves income from renting your personal residence for fewer than 15 days each year — that money isn’t taxable.

Deductions are available

While the income usually is taxable, you similarly may qualify for various deductions to lower the tax bite. The list of deductible expenses can include mortgage interest, property taxes, utilities, repairs, insurance and advertising.

The irs.gov website features an interactive online tool, “Is my Residential Rental Income Taxable?“, which can help determine if your income is taxable and whether you qualify for deductions.

Some housing expenses such as utilities and maintenance often can’t be fully deducted — just the business portion — so you will need to allocate those costs.

Suppose you rent a bedroom measuring 180 square feet or 10 percent of your home of 1,800 square feet. Suppose, also, that you lease it for 73 days of the year, or 20 percent of the time. If your annual airconditioning bill is $2,000, you multiply that by 10 percent and then by 20 percent. This results in a deductible air-conditioning expense of $40 and a non-deductible portion of $1,960.

Depreciation, an expense that reflects wear and tear, is among the costs you likely would need to allocate. For various reasons, depreciation will add an extra layer of complexity to your tax record-keeping.

Your capital-gain exclusion

Normally, homeowners can avoid paying taxes on some or all of their housing capital gains when selling, provided they owned and occupied the property for at least two of the five years preceding the sale. This is a hefty tax break, allowing a single person to exclude up to $250,000 in gains and a married couple up to $500,000.

But this benefit can get eroded if you lease the home or part of it. “Generally, the time you rent out your main home is considered a period of nonqualified use,” said Ernst & Young in its booklet. “No exclusion of gain is allowed to the extent that the gain is associated with a period of nonqualified use.”

More specifically, any gain at the time of sale would get divided between qual-

ified and nonqualified tax treatment, based on the amount of time used for each. The capital-gain exclusion can be used to shelter housing profits for periods of qualified use, but there’s no such exclusion for rental/nonqualified periods.

Your return could get complicated

Most regular employees pay taxes on an ongoing basis, through payroll withholding. With extra shared-economy income, you might need to make estimated payments on a quarterly basis, as the Internal Revenue Service highlighted in a recent commentary.

In fact, the added income could push you into a higher tax bracket, and you might need to file a more complicated return, with added record-keeping requirements. Rental income or losses are reported on Schedule C or Schedule E, Ernst & Young noted, which means filing the longer IRS Form 1040.