Websites such as Airbnb, VRBO, and HomeAway make it easier than ever to generate income by renting out a private residence, meeting the huge demand for home rentals, especially during the summer months when people go on vacation. However, the income collected from rental of a residence is typically subject to taxation, and there are special tax rules that must be followed. If you are a homeowner who plans to rent your property seasonally, you should be sure to understand whether your situation meets certain IRS requirements for taxation. 

Residential Rental Property Defined

The first step in determining how rental income will be taxed is understanding if the property you are renting is a residential rental property under the definition provided by the IRS. A dwelling will be classified as a residence if it is utilized for personal purposes during the tax year for 14 days, or for 10 percent of the total number of days the residence has been rented to tenants at its fair rental value, whichever is greater. Personal use could include the use of the dwelling by:

• Anyone who owns a part of the dwelling;
• Any family members of anyone who owns the property in whole or in part (unless the family member uses the dwelling as his or her primary residence and pays fair rental value to the owner);
• Anyone who uses the property as part of an arrangement that allows the owner to use a different dwelling; or
• Anyone who uses the property after receiving a discount that results in that person paying less than the property’s fair rental value.

Income, Deductions, and Other Considerations

According to the IRS, rental income includes regular and advance rent payments, penalties for lease cancellation, and expenses paid to the property owner by the renter. This income generally must be reported each year. 

In recent months, the news has been filled with discussion of cryptocurrencies such as Bitcoin, Ripple, or Ethereum. As these virtual currencies increase in value, many people are looking to invest in them. However, even though digital currencies can be exchanged for goods or services, or paid to employees as income, they are not the same as legal tender. This has resulted in a great deal of confusion as to how virtual currencies are treated under the United States tax laws.

Cryptocurrencies, Property, and Capital Gains

“Convertible” virtual currencies that have an equivalent value in real currency and can be exchanged into U.S. dollars are taxable as property, similar to other capital assets such as stocks or bonds. In general, capital gains taxes apply when these currencies are bought or sold, including when they are converted into cash, when one type of currency is traded for another virtual currency, or when digital currency is exchanged for other property. Any gains or losses are based on the fair market value of the currency at the time it was acquired and at the time of its sale or trade.