AirBnB Income Tax Return – How to calculate income tax on AirBnB earnings
November 2019 – Update on what is happening AIRBNB hosts for tax on their income
The Revenue have received information they need directly from Airbnb regarding hosts income. We believe thousands of enquiry letters have been issued by the Revenue to hosts but from what we hear the response from hosts has been to keep the head down and hope against hope that the Revenue will not catch up with them. This approach never works!
Some hosts have been identified for detailed examination by the Revenue.
If you receive what the Revenue call a Compliance Intervention or Enquiry letter you are not under Revenue audit (yet!). This letter may seek detailed information on how you calculated your figures and may also invite you to make corrections if required to your tax return. How you answer such a letter will determine if you are put under Revenue audit which is a very different type of experience.
From what we have seen the Revenue approach seems to be that Airbnb lettings in your own home will be considered as “occasional” which limits the level of expenses claim.
In one case we had an individual renting a two bed apartment and letting out one bedroom on Airbnb on an ongoing basis to help pay the rent for the apartment. The Revenue would not allow a tax allowance for the rent for the apartment to the landlord under the rules for taxing occasional lettings. We claim this is a trade and not an occasional letting and an allowance is due for the rent paid to the landlord.
Every case can be different and sometimes the distinction between occasional lettings and lettings which are a trade may be small but the tax difference could be substantial. See our earlier article below explaining the differing tax treatments between occasional lettings and a trade.
We will provide regular updates on how matters progress with the Revenue and their approach to taxing Airbnb hosts.
Airbnb and what the Revenue say
(As clear as mud!)
After much agonising by Airbnb renters wondering how the Revenue will tax their income some clarity has emerged at long last from the Revenue.
The Revenue have recently issued guidelines about the taxing of short term rental income or what the Revenue call income arising from the provision of short-term accommodation.
So first thing from a Revenue point of view is that short term rents using Airbnb (needless to say the Revenue do not refer directly to Airbnb) are never treated as rental income. Unfortunately this does not mean the income is not taxable!
Tax will be due on the profit made either on the basis of carrying on a Trade or for Occasional Income. The rules for taxing each are different.
First let’s consider what is Occasional Income? What does Occasional mean?
The Revenue say it is to be given its ordinary meaning e.g. “taking place from time to time” or “not frequent or regular”. How will tax inspectors interpret this? Say when you go on your holidays every year you let out your house. Is this frequent or regular? If you do this for a number of years and the house is let out for the same few weeks every year is this just “taking place from time to time”?
Giving the term Occasional its ordinary meaning solves the issue for someone who lets out one time only on Airbnb. But what happens if you do it 3 or 4 times one year and never again. Is this Frequent for that tax year or is it Occasional?
In the hope that common sense will prevail, a random letting each year will hopefully be considered Occasional rather than frequent.
What tax do I pay on Occasional income?
Unfortunately the rules for deciding your taxable profit are not as good as those that apply if it were a trade. Revenue practice will allow a deduction for direct incidental costs associated with the letting. Strictly speaking they do not have to give any tax deductions but they recognise costs are incurred and the examples of what they will consider as a tax deduction are –
- Commission paid to online booking sites
- Cleaning fees paid to independent provider not yourself
- Cost of breakfast provided to guests
- A reasonable apportionment of electricity, gas, heating costs incurred for guests
While this sounds reasonably generous, you get no tax deduction for any costs more associated with your property e.g. insurance, maintenance, TV licence etc. They consider you would be incurring these anyway regardless of whether or not you provide the short term letting so no tax deduction allowed for them.
You will pay normal Income Tax, PRSI and USC on your profit and will have to make a tax return for this to the Revenue for each year involved.
Now let’s consider what is a trade and how is such income taxed?
What constitutes a trade has caused much angst over a long number of years. There have been many legal cases about this, some of which the Revenue won and some they lost.
From the point of view of short term lettings, the important point here is the difference between a tenant and a guest. Generally short term renters have no tenant rights and do not have exclusive use of the property involved. The owner retains the right to access the property at any time and in fact needs this right to provide other services e.g. cleaning, room changes, providing meals etc.
So letting out a property on a regular basis on Airbnb is accepted as a trade and taxed under the rules for dealing with a trade. This gives greater scope for the claiming of expenses against the income earned.
The trade is treated like any business and all business related expenses can be claimed as a tax deduction. Here is a quick summary of some of the expenses –
- Equipment such as beds, furniture etc. – allowed over 8 years at an annual 12.5% rate.
- All direct costs e.g. cleaning services, ongoing property maintenance costs, commission payments for accommodation booking services etc.
- Pre trading costs – say you do up a property for short term lettings then any costs of a revenue nature (as opposed to capital nature) e.g. painting, decorating, repairs incurred in the preceding 3 years qualify for a tax deduction. Costs on capital expenditure (see 1 above) can be claimed as well over 8 years.
- No restriction on your mortgage interest relief claim as it is considered a commercial activity.
- Because it is a trade you can also make pension contributions as a tax deduction against the income.
So if you are doing this in your own name you are treated like any self-employed person as regards the making of tax returns and the dates for paying tax. Basically you will have to make a tax return every year and pay the tax you owe in October each year.
The profit you make is liable for Income Tax, PRSI and USC at your top tax rates.
The fact that it is a trade provides opportunities to manage the lettings in a more tax efficient way. For example using a company to carry on the activity which means the company profit will be taxed at the company tax rate of 12.5%. A lot less than the top personal tax rates! See simple example below showing the tax that could be saved.
|Example of tax effecient Airbnb structure|
|Property acquired at cost of say||500,000|
|Annual Income form Airbnb say||100,000|
|Management costs say||40,000|
|Assume top personal tax rate 52%||31,200|
|Company tax rate12.5%||7,500|
|Annual tax saving||23,700|
Depending on your circumstances it might even be possible to structure your affairs in a way that considerably reduces the tax that will be owed on taking the after tax profits out of the company at a later time. We can provide more detailed advice on this matter by way of consultation. Please contact our office for more details.[/vc_column_text]