Deduct expenses higher than earnings?

Leslie175
Level 1
Denver, CO

Deduct expenses higher than earnings?

Hi folks,

 

This is my first year hosting.  I did a basement renovation that cost me about $20k, including contractor labor and materials earlier this year.  Post-reno, I opened my basement for hosting in summer, and earned about $12k through hosting.  I also have a typical full-time job, and typically deduct student loan interest, mortgage interest, and chartiable giving from my taxes.   I do plan to contract with a tax pro to help me file this year, but was wondering in the meantime - can my deduction on the airbnb rental be greater than my income from it in a given year?  If not, I'll quit filing all these receipts and just deduct my contactor expenses (which alone were over my earnings for this year).  If so, I'll keep saving all those receipts (on supplies and expenses) for tax time!  

 

Thank you for any advice!

Leslie

7 Replies 7
Cynthia-and-Chris1
Level 10
Vancouver, WA

@Leslie175 As an accounting professonal, I’ll say: it varies depending on your taxable situation. 

 

Keep all all your receipts and records for your tax professional and let them decide. 

@Leslie175, @Cynthia-and-Chris1, it is not super simple, and it is best to consult your tax professional. (I am not a tax professional.)

My understanding is that renovations paid out of pocket are not deductible expenses at all, but rather are treated as an investment. This means you cannot deduct it, but it does increase the cost basis of your property, which will eventually reduce your capital gains at the time you sell the property. As a capital expense, you may be able to depreciate it, which would allow you to slowly claim the deduction over 27.5 years.

Also:

If the remodeling was for a medical necessity, then it may be deductible to a certain extent.

If you can classify any part of your remodel as a repair, then that part can be deducted on Schedule E.

If your remodel happened at the time of original purchase, it of course can be rolled into your mortgage, and is deductible that way.

This is just a broad overview, and your tax professional should be able to provide advice for your specific situation.

Raf3
Level 2
San Francisco, CA

@Leslie175Yes your deductions can be greater than your income which is why you should keep all the receipts - your ABB activity could lower your taxes from your full time job.  There are exceptions (if you used the renovated room personally or rented it for less than 15 days).

 

Even if your rental activities are long term in nature (i.e. passive income on Schedule E) you could deduct up to $25k in losses depending on the level of your other income.

 

To elaborate on the posts below, you'll want to maximimize repairs by segregating repairs from improvements. Get an itemized bill so that all the work isn't lumped in to the renovation. For some types of repairs (i.e. fiberglass shower pan leaking) there's really no other way to repair but to renovate and build a new shower. Another tip: depreciate everything separately (ceiling fans, cabinets,etc...) from the house as they all have separate useful lives that are less than depreciation on residential real estate = higher deductions for you.

 

Don't forget mileage for all those trips to Home Depot...and if you need more ideas for tax deductions check out my website. I do CO returns too.

 

Good point regarding "mileage for all those trips to Home Depot"! How about trips to inspect the property and/or giving keys to guests?

 

btw, I've been using this mileage app https://itunes.apple.com/us/app/veryfi-logbook-mileage-tracker/id1299311240?mt=8 to keep mine. Should I continue doing that? or is there a different/recommended way?

Rene-and-Zac0
Level 10
La Quinta, CA

@Leslie175 I too have done some major repairs and upgrades to my listing. My AC system for instance, the entire project was $3600 but the equipment is depreciated over 25 years and the installation labor is a legit expense you write off and lower your tax liability that same tax year. So the labor you write off this year and the durable equipment is depreciated over 25 years. 

The transaction fees that Airbnb charge are also deducted as well from your taxes.

 

The most important thing I can say about renovations is, have the contractor itemize the bill into equipment and labor. Save every single receipt! Every single penny that you spend or are charged, can be taken on your taxes and it lowers your tax liability. 

Good luck! Of course your best results will come from speaking with a tax professional.

‘You know it’s hard out here for a Host’

Good points. I'm assuming the split of equipment vs labor is that equipment will be depreciated over its schedule and labor a 1 off deductible right?

 

Curious re receipt collection, shoebox or dropbox or what to save the receipts into?

And how do you marry it to the AirBnB ledger? I'm trying to figure that one out now for myself 🙂

This is my first year hosting and I have gone "old school" and are detailing all expenses in a hard copy notebook complete with receipts.