Airbnb has provided the Revenue with the information they require regarding host income. We believe the Revenue has sent thousands of inquiry letters to hosts, but from what we’ve heard, the hosts’ response has been to keep their heads down and hope against hope that the Revenue will not find them. This method is never successful!
The Revenue has identified some hosts for further investigation.
If you receive a Compliance Intervention or Enquiry letter from the Revenue, you are not under audit. This letter may ask for more information about how you arrived at your figures, as well as an invitation to correct your tax return if necessary. The way you respond to such a letter will determine whether you are subjected to a Revenue audit, which is a very different experience.
According to what we’ve seen, Revenue considers Airbnb lettings in your own home to be occasional, limiting the amount of expenses you can claim.
In one case, a person rented a two-bedroom apartment and rented out one of the bedrooms on Airbnb on a regular basis to help pay the rent. Under the rules for taxing occasional lettings, the Revenue would not allow the landlord to claim a tax deduction for the apartment’s rent. We argue that this is a business transaction rather than a one-time letting, and that a rent allowance is due for the rent paid to the landlord.
Every case is different, and while the difference between occasional lettings and lettings as a business may be minor, the tax difference can be significant. See our previous article for more information on the differences in tax treatment between occasional lettings and a business.
What the Revenue says about Airbnb
After much agony from Airbnb renters wondering how the Revenue will tax their income, the Revenue has finally provided some clarity.
The Revenue recently issued guidelines on the taxation of short-term rental income, or income arising from the provision of short-term accommodation, as defined by the Revenue. So first and foremost, short-term rents obtained through Airbnb (needless to say, the Revenue does not directly refer to Airbnb) are never treated as rental income. Unfortunately, this does not negate the fact that the income is taxable!
Profits made as a result of carrying on a business or as a result of Occasional Income will be subject to tax. Each has its own set of rules for taxation.
What does the term “occasional” imply?
According to the Revenue, it should be given its ordinary meaning, such as occurring from time to time or not occurring on a regular basis. What will the tax inspectors make of this? Let’s say you rent out your house every year when you go on vacation. Is this something that happens frequently or on a regular basis? Is this just occurring from time to time” if you do this for a number of years and the house is rented for the same few weeks every year?
For someone who only rents out on Airbnb once giving the term Occasional its ordinary meaning solves the problem. But what if you do it three or four times in a year and then never again? Is this something that happens frequently during that tax year or only once in a while?
A random letting each year will hopefully be considered Occasional rather than frequent in the hopes that common sense will prevail.
What tax do I have to pay on sporadic income?
Regrettably, the rules for determining your taxable profit aren’t as good as they would be if you were trading. A deduction for direct incidental costs associated with the letting will be allowed under IRS rules. They are not required to provide any tax deductions, but they recognize that costs are incurred, and the following are examples of what they will consider a tax deduction:
Online booking sites are compensated with a commission.
Cleaning fees are paid to a third-party provider rather than to you.
Breakfast is included in the room rate.
A fair distribution of electricity, gas, and heating costs incurred by visitors.
While this seems generous, any costs directly related to your property, such as insurance, maintenance, and TV license, are not tax deductible. They believe you would incur these costs regardless of whether you provide short-term letting, so there is no tax deduction for them.
On your profit, you will pay regular income tax, PRSI, and USC, and you will be required to file a tax return with the Revenue for each year involved.
Let us now consider what a trade is and how such income is taxed.
Over the years, there has been much debate about what constitutes a trade. There have been numerous legal cases involving this, some of which the Revenue has won and others in which they have lost.
The distinction between a tenant and a guest is particularly important in the context of short-term lettings. Short-term renters typically do not have tenant rights and do not have exclusive use of the property. The owner retains the right to enter the property at any time, which he or she requires in order to provide other services such as cleaning, room changes, and meal preparation.
As a result, letting a property on Airbnb on a regular basis is accepted as a trade and is taxed according to the rules for dealing with a trade. This opens up more possibilities for claiming expenses against earned income.
The trade is treated as if it were a business, and all business-related expenses can be deducted from your taxes. Here’s a quick rundown of some of the costs.
- Equipment (beds, furniture, etc.) allowed over an 8-year period at a rate of 12.5 percent per year.
- Cleaning services, ongoing property maintenance costs, commission payments for accommodation booking services, and so on are all direct costs.
- Pre-trading costs if you renovate a property for short-term lettings, any revenue-related (as opposed to capital-related) costs, such as painting, decorating, and repairs, incurred in the previous three years are tax deductible. Capital expenditure costs (see 1 above) can also be claimed over an 8-year period.
- Because it is considered a commercial activity, there are no restrictions on your mortgage interest relief claim.
- Because it is a trade, you can deduct pension contributions from your earnings.
So, if you’re doing it in your own name, you’ll be treated the same as any other self-employed person when it comes to filing tax returns and paying taxes. Essentially, you will be required to file a tax return each year and pay any taxes due in October.
At your highest tax rates, the profit you make is subject to Income Tax, PRSI, and USC.
Because it is a business, there are opportunities to manage the lettings in a more tax-efficient manner. Using a company to carry on the activity, for example, means that the company profit will be taxed at the 12.5 percent company tax rate. A lot less than the highest individual tax rates! See the simple example below to see how much money you could save on taxes.
Depending on your circumstances, it may even be possible to structure your affairs in such a way that the tax owed on taking the after-tax profits out of the company at a later date is significantly reduced. By way of consultation, we can provide more detailed advice on this subject. For more information, please contact our office.