Short term rental expenses and deduction

[femi_]

Hello,

I purchased a home in April 2023. It took me two months to furnish the move and move in. This home then became my primary residence. I put up one of the rooms on Airbnb and used a second room for storage of which most of the items stored there were for the Airbnb like extra sheets, guest supplies, cleaning supplies etc while I stayed in the third room. 

The room is only ever used for Airbnb but occasionally I block some days when I will not be able to clean due to not being in town or something needs to be changed/fixed.

The average stay of each guest is well under 7 days ~3 nights per guest. I have put in well over 100 hours solely into the Airbnb even though I only started in July.

My understanding is that:

1. I have full rental expenses like the tv, bed, furnishing, supplies I purchased for the room and x% expenses like mortgage interest, PMI, depreciation, home insurance, utilities, certain closing costs and real estate taxes where x% is the percentage of the home used for the rental. My questions are:
   1. Will the x percentage be calculated based on days listed combined with the percentage of home rented? e.g if the room is 500sq ft and the total home is 1500 sq-ft AND the room is listed (occupied or vacant) for 150 out of 200 days (because 50 days were blocked from me not being in town or unavailable to prepare the room), the percentage would 150/200 * 500/1500 leading to .33 * .75 which is 25% 
   2. Should the blocked nights be counted as rental days since I didn't use it for personal use? Thereby eliminating the need for calculating what % of days was used for rental.
   3. Given I used an extra room for storage supplies for the other guest, can I include a percentage of that room say 50% into the percentage of the home used for rental?
2. Since my average rental is less 7 days per guest and I have put in more than 100 hours:
   1. can I deduct net losses against my active income?
   2. The turbo tax online premium doesn't seem to let me input all this information: When I select short-term rental/vacation home (since my average rental is less than 7 days), I no longer get the option to choose a rental use percentage. Can the online portal not handle this scenario?
3. Deductions:
   1. Can I take a percentage home office deduction since I have an office at home that I use to manage the Airbnb (but I also use it for other personal uses).
   2. Are my closing costs and homeowners' insurance deductible at a percentage for the Airbnb?

[DianeW777]

Yes your understanding is correct.

1.  'I have full rental expenses like the tv, bed, furnishing, supplies I purchased for the room and x% expenses like mortgage interest, PMI, depreciation, home insurance, utilities, certain closing costs and real estate taxes where x% is the percentage of the home used for the rental.'
   1. Yes, and you can use the square feet of the extra room if it is strictly for the Airbnb activity and no personal use of items stored there (if you didn't do that already). The calculations are reasonable for accuracy.
   2. No the days the unit was not available cannot be counted because you literally would not rent it during those days.
   3. Answered in number one, the key is that the storage square feet must be for the Airbnb activity only and it must be identifiable as a distinct space for the Airbnb.  This means it could be 50% as you mentioned.
2. It's unclear if you are reporting this on Schedule C for self employment or Schedule E for residential rental.  I would advice you to report it on Schedule E assuming you are not providing amenities substantial services and enter the percentage of expenses, the home asset at the business use percentage and calculate the percentage as you have already done. Then indicate it was rented all year.  You have your records should you need them later. 
   1. Should I report my rental on Schedule E or Schedule C?
      • Schedule E allows passive activity losses against other income if you meet the income levels. Phaseout Rule: The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.
      • Schedule C, although you have a loss now, would require self employment tax in any profit year or years.
3. Deductions:
   1. No, the home office must be exclusive use. IRS Publication 587
   2. Closing costs incorporate many items.  See the list below that can be added to the cost of your home, then include that amount with the total cost basis before you enter the depreciation cost basis.  

Government Recording and Transfer Charges 

• Recording fees
• Title Charges
• Lenders Title Policy
• Settlement or Closing Fee
• MLC  - Assuming it means Municipal Lean Certificate
• Title Exam
• Owners title Insurance

You can include these closing costs and add them to the cost basis of the property as noted above.

[femi_]

Thank you.

As for what schedule to use, my understanding is that since:

1. I don't provide substantial services I can use sch E
2. Since the average rental days is less than 7 and I materially participate in the rental, that provides an exception to make the loss non-passive and able to be used against non-passive income as well.

[DawnC]

1.) That is true, but see #2 - 

2.) To be all non-passive, it would need to be reported on Schedule C.    There is a special allowance of 25K (for Schedule E) of passive income to offset non-passive income.   

See this discussion that explains the exceptions to filing Schedule E.  

Tax Tips for renting out a room in your home