Have you ever thought about using Airbnb for extra income? Since Airbnb launched in 2009, it has become a dominating player in the hospitality industry, offering those seeking overnight stays countless options of unique properties to rent, in a wide range of prices. The platform has caused a 180 degree shift in how travelers book their stays, allowing the end user to forego the typical hotel experience and provide, what Airbnb describes as a “unique opportunity to travel with a local”. Airbnb has quickly become a mainstay in many countries all over the world, with 100+ million travelers booking stays via Airbnb annually.
While those renting out their units for Airbnb travelers are glad to be bringing in additional income and access to more cash flow, they need to be aware of the tax and business issues when using Airbnb for extra income.
Today, the Zeifmans Real Estate Team will be addressing the key issues pertaining to those renting out their properties on Airbnb in Canada.
Will the value of my property decline if it becomes available for rent on Airbnb?
Renting a property on Airbnb will not directly decrease the value of a property. In fact, the opposite can occur. If the vendor can show a potential purchaser the cash flow potential for renting out the property via Airbnb, a purchaser may be more comfortable paying the asking price knowing the cash flow from Airbnb can help offset some of the carrying costs of the property. However, if a neighborhood is packed with homes consistently rented out via Airbnb, the vicinity may become known as renter’s zone and may lower the property values in the community as a whole. Furthermore, typical wear and tear from increased use by various tenants could decrease the value.
It is important to note, if the property is damaged while being rented, the owner would have to incur the repair cost before putting it up for sale.
Can a property owner be sued if a tenant slips and falls while renting the property via Airbnb?
Yes – you could be potentially sued.
It is very important that one has adequate insurance in case an unfortunate accident happens. Typical homeowners insurance may not cover tenant accidents when the property is rented out. In addition, if one holds their property in a corporation, other assets in the corporation may be at risk in case of a lawsuit. One should speak to an insurance advisor to ensure they are properly protected.
How is income from Airbnb reported on one’s personal income tax return?
There are two options – It can be reported as rental income or as business income. If only rental services are provided, income should generally be categorized as rental. If other services are provided on top of rental income such as catering services and transportation services, it could qualify as business income.
A few examples of the differences between rental income and business include:
- Business income is subject to Canada Pension Plan Premiums while a rental income is not.
- Business income is included in the calculation regarding the working income tax benefit, which include, the refundable medical expense supplement and childcare expense deduction. Rental income is excluded from these calculations.
- Business income is not subject to limitations on taxable depreciation – rental income is.
- Rental income and business income are reported on different forms on the tax return.
How are Airbnb profits dealt with if earned in a corporation?
The key differences between revenue earned personally vs a corporation, is that in a corporation rental income would generally be considered passive income while business income would be considered active. The income tax ramifications regarding active vs passive income are substantial and are beyond the scope of this piece.
If you are owed revenue but have not received the funds from an Airbnb rental at the end of the year it considered taxable revenue for the year?
Yes, cash that has not yet be received is still considerable taxable for the corresponding year payment was due. Once the rental service has been completed, revenue is considered earned. However, if revenue that was earned is not expected to be collected, the receivable can be expensed as a bad debt.
Are expenses incurred from Airbnb considered deductible if it is payable at the end of the taxpayers fiscal year?
As long as the expense was incurred in the fiscal year, it is deductible. It need not be paid, just payable (if an invoice was received) or accrued (an invoice is expected).
Are capital expenditures deductible to the taxpayer?
Capital expenses relating to the property are expenditures that are for long-term benefit in nature or incurred to improve the property beyond its current state. For example, a bathroom renovation or acquiring furniture to remodel a room would be considered capital expenditures. These items must be deducted over the useful life of the asset as allowed under the Canadian tax law.
Are fees paid to Airbnb for use of their platform deductible?
Yes, these are considered deductible expenses just like repairs and maintenance. They were incurred to earn income and thus are fully deductible.
If a taxpayer rents out their principle residence a few times a year via Airbnb, will they still be able to claim the principle residence exemption (“PRE”) on the property?
Absolutely, as long as they stay within certain guidelines. Depreciation should not be claimed on the home. In addition, the taxpayer must continue to reside in the home for at least a part of the year. For a more detailed discussion of the PRE, see our previous blog, Do you rent out your home? Are you self-employed with a home office and selling your primary residence? Know these facts and save on tax!
What are the income tax implications if a home that would qualify for the PRE is being converted into a full time Airbnb property?
There is a deemed disposition on the property as there is a change of use of the property, which allows one to continue to claim the PRE for an additional four years after the change of use. For information about this reach out to your Zeifmans advisor or contact a member of Zeifmans Real Estate Team.
Are there HST ramifications surrounding renting a property via Airbnb?
Generally, if you have earned revenue from Airbnb, along with revenues from other businesses exceeding $30,000 in the prior four calendar quarters, you must collect HST on revenue and remit it to the Canada Revenue Agency (CRA). Any HST paid by the taxpayer reduces the amount of HST collected dollar for dollar. In fact, a taxpayer may be entitled to an HST refund. If you have more questions about this please reach out to your Zeifmans tax advisor today.