How the Republican tax plan will impact your Airbnb income
What the new bill could mean for your Airbnb come tax season
Last week the Senate voted to pass a major tax bill, the largest rewrite of the U.S. tax code in 30 years. Both versions make sweeping changes to the tax structure of both corporations and individuals. One of those changes shifts how passive income is taxed, and that affects AirBnB hosts, whose income is taxed as a small business. Before the bill heads to the President’s desk, the Senate and House versions of the bill have to be reconciled, and while the final language remains to be seen, both would have impacts for hosts.
To understand how the changes might impact you, let’s take a look at how AirBnB income is currently taxed.
Most hosts are considered sole-proprietors, meaning a single owner receives all the business income from a listing. Each year AirBnB sends hosts a 1099-K form, stating their taxable income. Hosts must report that income to the IRS, and pay applicable taxes.
Hosts are subject to the self-employment tax, but you can write off expenses against your other income. To keep things simple, let’s forget about deducting business expenses, except for the mortgage interest and property tax deductions, and focus on self-employment and personal income taxes.
Here’s an example under the current law for someone earning $50,000 in taxable Airbnb income, filed as single, with itemized deduction.
Self-employment tax: $7,065.00
Personal income tax: $5770.00
Total taxes owed : $12,835.00
Self-employment tax: $50,000 x 92.35% of net earnings x 15.3% for social security and Medicare
Personal income tax: $50,000 — $1,000 mortgage interest –$5,000 in property taxes — $3532 half self-employment tax = $38,468 x tax bracket of 15%
And keep in mind, the more income you earn, the higher the tax bracket for personal income taxes. In 2017, income over $418,400 is taxed at a rate of 39.6 percent. But come 2018, depending how the House and Senate reconcile the differences in how pass-through income is taxed, which is how most Airbnb businesses handle income, this could all change.
Here’s how all that could change:
The House bill cuts the number of tax brackets down from seven to four, reduces the top tax rate from 39.6 percent to 25 percent, and boosts the standard deduction. The bill also limits mortgage interest deductions to the first $500,000 of a mortgage, down from $1.1 million currently. It also caps the property tax deduction at $10,000, which will hurt owners in high property tax states, or those with expensive listings. Keep in mind, under this bill the mortgage de only applies to your primary residence.
For hosts with income under $250,000 the Senate version takes a different approach. This version allows for deductions of 23% of their income from their business, which means they would only pay taxes on 77 percent of their income. But there’s a catch, you would only be able to claim the 23 percent deduction to a point, equal to 50% of the wages paid out by the business. This could apply to money you pay to someone else to manage your property, such as a co-host. And if your income is less than $250,000 (single) the wage limitation doesn’t apply.
The Senate bill also eliminates the personal exemption, maintains the mortgage interest reduction, and caps the property tax reduction at $10,000, in addition to bumping the standard deduction up to $12,000, and re-shuffling the tax brackets.
Real-world example:
Under current law, earning $200,000 of Airbnb income
Self-employment tax: $28,259
Personal income tax: $49,523
Total taxes owed: $77,782
Self-employment tax: $200,000 x 92.35% of net earnings x 15.3% for social security and Medicare
Personal income tax: $200,000 — $2,000 in mortgage interest — $7,000 in property tax — $14,129 half the self-employment tax = $ 176,871 x tax bracket of 28%
Senate bill, earning $200,000 of Airbnb income
Self-employment tax: $28,259 (unchanged)
Personal income tax: $32,686
Total taxes owed: $60,944
Self-employment tax: $200,000 in taxable income x 92.35% of net earnings x 15.3% for social security and Medicare
Personal income tax: $200,000 — $2,000 in mortgage interest — $7,000 in property tax — $14,129 half self-employment tax — 23% percent of income = $136,190 x tax bracket of 24%
House bill, earning $200,000 of Airbnb income
Self-employment tax: $28,259 (unchanged)
Personal income tax: $44,217
Total taxes owed: $72,476
Self-employment tax: $200,000 in taxable income x 92.35% of net earnings x 15.3% for social security and Medicare
Personal income tax: $200,000 — $2,000 in mortgage interest — $7,000 in property tax — $14,129 half self-employment tax = $176,871 x top tax bracket of 25%
Under both the House and Senate versions of the bill, an AirBnB host bringing in $200,000 a year would pay less in taxes than under the current law. The Senate bill gives the biggest boost, thanks to an additional reduction in the tax brackets.
What about Airbnb’s highest income hosts?
Only a small number of people would benefit from a 25 percent cap, as most sole-proprietors and other small businesses are taxed under 25 percent. But let’s say you’re one of the handful of AirBnB hosts bringing in $1,000,000 a year. The 25 percent rate would be very beneficial, while the changes to the property tax reduction might set you back.
Current law, earning $1,000,000 of Airbnb income
Self-employment tax: $141,295
Personal income tax: $357,331
Total taxes owed: $498,626
Self-employment tax: $1,000,000 x 92.35% of net earnings x 15.3% for social security and Medicare
Personal income tax: $1,000,000 — $10,000 in mortgage interest– $17,000 in property taxes — $70,647.5 half self-employment tax = $ 902,353 x tax bracket of 39.6%
Under the House bill, earning $1,000,000 of Airbnb income
Self-employment tax: $141,295 (unchanged)
Personal income tax: $227,338
Total taxes owed: $368,633
Self-employment tax: $1,000,000 x 92.35% of net earnings x 15.3% for social security and Medicare
Personal income tax: $1,000,000 — $10,000 in mortgage interest — $10,000 in property taxes — $70,647 half self-employment tax = $ 909,353 x tax bracket of 25%
So, if the final tax law winds up like the House bill, a high-income host could save $134,175. For the high-earner, the Senate bill winds up looking a lot like the current law. You could still write off your mortgage interest, and property taxes up to $10,000. And your income would be taxed at a similar bracket unless you paid out W-2 wages to an employee.
For casual hosts, or those earning less than $50,000 a year from his or her listing, the two tax proposals would have little impact on the average hosts tax bill. The one exception to this would be a cap on property tax deductions at $10,000 — which could impact how much hosts can write off in high-cost housing areas.
Both versions of the bill are weighted heavily towards people with high incomes.
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