Is Airbnb Rental Income Subject to Self-Employment Tax?
Do you owe self-employment tax on Airbnb rental income?
Do you owe self-employment tax on Airbnb rental income?
That’s a good question.
In Chief Counsel Advice (CCA) 202151005 dated November 19, 2001, the IRS opined on this issue.
But before we get to what the IRS said, understand that the CCA’s conclusions cannot be cited as precedent or authority by others, such as you or your tax professional.
CCA’s conclusions cannot be cited as precedent or authority by others
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CCA’s conclusions cannot be cited as precedent or authority by others 〰️
Even so, we always consider what the CCA says as semi-useful information, so here’s some analysis that goes beyond what the IRS came up with.
What is The Exact Question?
To be specific, the CCA asks whether or not the net income from renting out living quarters is excluded from self-employment income under Section 1402(a)(1) when the property owner is not classified as a real estate dealer. Those who “deal” in real estate (think property flippers) are usually subject to self-employment taxes. Those who are not “dealers” (think landlords) are usually not subject to self-employment taxes. So, if excluded under IRC Section 1402(a)(1), you don’t owe self-employment taxes on your net rental income. Needless to say, that’s the outcome you want to see, and we’re here to help.
What were the Facts of the CCA Cases?
There were 2 different taxpayer situations addressed in this CCA memorandum….both are common and relatable to most owners of short-term rentals…
The first case was an individual who owned and rented out a furnished beachfront vacation property via an online rental marketplace (such as Airbnb or VRBO) for short amounts of time to vacationers. The taxpayer was not a dealer. The taxpayer provided kitchen items, fresh linens, daily maid service, Wi-Fi, access to the beach, recreational equipment, and prepaid vouchers for rideshare services between the rental property and a nearby business district.
The second case was an individual who owned and rented out a furnished bedroom and bathroom in a primary home via an online rental marketplace for short amounts of time. The taxpayer was not a real estate dealer. Renters had limited access to the common areas of the home only to enter and exit the bedroom and bathroom. They had no access to other areas of the home such as the kitchen and laundry room. The taxpayer cleaned the bedroom and bathroom between each renter’s stay, not daily during the rental stay.
The CCA’s Different Conclusions about the Cases
According to the CCA, when you’re not a real estate dealer, net income from renting out living quarters is considered “rental income from real estate” and is therefore excluded from self-employment income—as long as you don’t provide services to rental occupants.
The self-employment income exclusion for net rental income collected by a non-dealer is a statutory provision. But, the statute itself doesn’t say anything about providing services. To be clear, the IRS does not give clear guidance on exactly what qualifies as a “service”….most likely leaving it purposefully vague for a reason.
IRS regulations do state that providing services to renters can potentially cause you to lose the exclusion from self-employment income. According to the CCA’s memorandum, you must include the net rental income in calculating your net self-employment income—which could cause you to owe the dreaded self-employment tax (ugh!)—if you provide services to renters and the services are:
not clearly required to maintain the living quarters in a condition for occupancy, and
so substantial that compensation for the services constitutes a material portion of the rent.
Note….both bullet points must be met. Both!
So, according to the CCA, determining whether providing services to renters will trigger exposure to the self-employment tax is THE BIG ISSUE for folks who rent out living quarters….especially those with short-term rentals.
Conclusion for Case 1
According to the CCA, the taxpayer’s net rental income from the vacation property in was not excluded from self-employment income because the taxpayer provided substantial services above and beyond what was required to maintain the property in a condition suitable for rental occupancy. In our humble opinion, it was likely the daily maid services that tipped the services into “substantial”.
Conclusion for Case 2
According to the CCA, the taxpayer’s net rental income was excluded from self-employment income because the taxpayer did not provide substantial services above and beyond those required to maintain the living quarters in a condition suitable for rental occupancy.
Make special note of the key words “substantial services” and “above and beyond”. They matter.
Our Alternative Analysis
The CCA’s anti-taxpayer conclusion in Case 1….the beachfront property situation….rests on the GIANT assumption that the services provided by the taxpayer were “above and beyond what was normally required”. But were they actually substantial services? Maybe. But probably not!
The Customarily Issue
According to IRS regulations, services are generally considered “above and beyond the norm” if they exceed the services that are customarily provided to renters of living quarters. Services that simply maintain a vacation rental property in a condition that is customary for rental occupancy should not be considered above and beyond and therefore should not trigger exposure to the self-employment tax.
In assessing whether services provided to renters are “above and beyond what is customary”….the circumstances matter.
Let’s contrast expensive vacation resort areas. In the real world of expensive vacation resort areas, renters customarily expect and receive lots of services that might be considered “above and beyond” in other rental circumstances. For instance, in resort areas, renters customarily expect and receive cable service; Wi-Fi access; daily housekeeping services, including changing bedding and towels on demand; immediate repair of failed appliances; replacement of burned-out lightbulbs; replacement of dead smoke alarm batteries; access to recreational equipment such as bicycles, kayaks, beach chairs, umbrellas, and coolers; concierge services; and so forth and so on. That’s a lot of services!
So, why are lots of services provided in expensive resort areas? Because rental charges in expensive resort areas are—wait for it—expensive! The cost may be $2,000 or more per week or $5,000 or more per month, or even higher during peak periods—maybe much higher! So, the portion of charges that renters pay that could be attributed to the aforementioned services would almost always be a tiny fraction of the overall rental charges.
In the context of expensive resort vacation rentals, it’s hard to imagine any services that would be so “above and beyond the norm” as to be a material portion of the rental income and that cause the property owner’s net rental income to be exposed to the self-employment tax.
In the context of small short-term rentals with much smaller rents, it is easy to imagine that some costly services that are “above and beyond the norm” might constitute a material portion of the rents received. But most services provided don’t reach the level of “above and beyond the norm” (think Keurig machine with some K-Cups, or a few laundry detergent tabs, for example). Cleaners are generally the most expensive cost of an Airbnb, which usually happens in-between renters…not as a service to the renter directly.
Side note: It doesn’t matter to the IRS if the services are provided directly by the owner of the property (unlikely) or indirectly by a rental management agency and included as part of the fee paid by the owner of the property (likely).
The Substantiality Issue
In assessing whether services provided to renters are “above and beyond the norm”, substantiality also matters. This is where the term “Substantial Services” is derived.
In a different Tax Court decision, the court addressed a situation where the taxpayer rented out trailer park spaces and furnished laundry services to tenants. The laundry services were clearly provided for the convenience of the tenants and had nothing to do with maintaining the trailer park spaces in a condition for rental occupancy. Tenants were not separately billed for the laundry services and the services were not separately paid for.
The Tax Court concluded that any portion of the rental payments that was attributable to the laundry services was not substantial enough to trigger exposure to the self-employment tax. Accordingly, the Tax Court opined that all of the trailer park owner’s net rental income was excluded from self-employment income. We agree!
Final Thoughts
As stated above, in the context of the expensive vacation properties and short-term rental examples, any portion of rental charges that could be attributed to the provision of the most common services would likely always be not substantial in relation to the overall rental charges. If the services are not substantial, according to the Tax Court, then provision of such services would not expose the short-term rental property owner to the self-employment tax.
Wanna read the CCA’s IRS memorandum for yourself?
You can check it out here.
