Normally, any type of income that you earn is taxable under the United States tax code, unless the income is specifically excluded from tax. Income earned from renting real estate is definitely taxable. However, under section 280A of the Internal Revenue Code, rental income earned by a homeowner not in the business of being a landlord is tax free.
Section 280A defines that one is not considered to be in the business of being a landlord if the owner of a home uses that home as a personal residence and rents out that home for less than 15 days in any year. This exclusion from taxable income derives from the practice of homeowners living in Augusta, Georgia who would rent their home or part of their home to tourists who wanted to come to Augusta for a week to watch the Master’s Gold Tournament in early April every year.
This exclusion will not apply to a home that is normally a rental property that happens to be empty for a while. However, it would apply to a business owner who wants to use his/her home for business meetings. The homeowner would be able to charge the business rent for the meeting. The business would pay the rent and take a business deduction for this payment. But the homeowner would not need to declare the rent as income, as long as the total number of days the home was being rented during the year was less than 15.
In order for this exclusion to pass IRS muster, the rent being charged and paid must be what a normal rent would be for this type of property, or Fair Market Value. Looking at Airbnb or Vrbo listings in the area would be a good place to start to ascertain fair market value.
If you do make use of the Augusta rule, since you are not reporting the income, no expenses will be deductible as rental expenses either. This exclusion of expenses only applies to the expenses incurred for the rental usage of the property. There is no need to disallow a portion of mortgage interest or real estate taxes from your Schedule A Itemized Deductions.
This taxable income exclusion is actually applicable this year to Howard County residents. Last month there was the inauguration of a new president down the road in DC. Anyone who rented their residence to a tenant for this purpose for a few days even through Airbnb or Vrbo may not have to report this income. Speak to your tax advisor about your specific situation.
Moshe Pelberg, CPA, is a Certified Public Accountant in Maryland who is a contributing columnist who writes on financial matters.
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