University of Maryland Tax Expert Tells Why It’s a Pitfall for the Hosts
In the same way that Uber and Lyft turn regular cars into taxis, Airbnb has made every house on your street a potential hotel. Thanks to an accounting trick at Airbnb, most of the side income that hosts receive goes unreported to the IRS. Many host families will take this as an invitation to evade taxes on April 18. But accounting professor Leslie Mostow at the University of Maryland’s Robert H. Smith School of Business, and a CPA with more than 50 years of tax preparation experience, warns that IRS auditors have tricks of their own.
Airbnb markets itself as a homestay broker with slogans such as “explore the world” and “belong anywhere.” But it’s really a payment settlement entity. At least that’s what Airbnb tells the IRS, taking advantage of 1099-K rules set up for credit card companies that process transactions for merchants. The difference means that Airbnb doesn’t have to send 1099-Miscellaneous Income statements to most U.S. hosts — only the ones who surpass $20,000 and 200 transactions in the same calendar year.
Considering that each Airbnb transaction represents a minimum of one overnight stay, and the average stay in major cities is closer to five or six days, reaching the 200-transaction threshold within 365 days is nearly impossible for anyone without multiple rooms and overlapping guests. By comparison, transactions take microseconds for traditional and online retailers, and big merchants such as Wal-Mart start qualifying for 1099-Ks on Jan 1.
Mostow says hosts need to understand that their income is taxable regardless of the reporting strategies used at Airbnb and similar companies. He says most of these hosts fall into the same category as College Park landlords who rent their basements to University of Maryland students. It makes no difference if Airbnb brokers an international deal or if local tenants respond to a yard sign.
Catching unreported Airbnb income might even be easier than traditional omissions because every transaction leaves a digital trace stored in one location. “IRS agents might walk into Airbnb headquarters in San Francisco one day,” Mostow says.
Maryland agents did something like that a few years ago, when they visited Delaware stores and got the dirt on shoppers crossing state lines to avoid sales tax. (Delaware doesn’t charge any, but Maryland residents still have to pay a “use tax” on items they bring home.)
So what’s an honest taxpayer to do? The basic rule is simple. “You are taxed on worldwide income, regardless if anyone sends you a 1099 – even if you get paid in bitcoin,” Mostow says.
He says worried hosts should start with Internal Revenue Publication 527, where they’ll learn about “incidental rentals,” “passive activities,” and the difference between primary and vacation properties. Most hosts will have to measure the square footage of their guest space and divide it by the home’s total size. But don’t forget Chapter 4 about “special situations.”
For more Smith School faculty insights, go to Smith Brain Trust.