Tax season is well underway.
While some of us have had our taxes completed and filed for several weeks, there are those of us who will plan on getting to it every week until April 17th is here.
Wanting to delay the hours worth of paperwork for as long as possible is understandable, especially if your tax situation comes with some complexities.
If you bring in additional income with a side hustle it can complicate matters even more.
It is easy to stress over receiving all of your 1099s forms, figuring out if you owe additional Social Security tax, and worrying that you will be caught unprepared for a higher than expected tax bill.
There is one side hustle that can give you all of the fun of additional income with none of the worries about taxation. In fact, this side hustle comes with no tax burden at all and minimal work to get started.
What is it you ask? It’s Airbnb (or other short term home rental platforms).
I know what you are thinking. “Airbnb income is definitely taxable.” For many people this is true. However, when I was preparing my 2015 taxes, ready to report thousands of dollars in Airbnb income I was pleasantly surprised to learn that I did not have to report any of it.
Why? Because despite earning over $3,000 I had only listed and had my condo booked for thirteen nights of the year. Thanks to a little known loophole in the tax code this income was not only exempt from taxation, it didn’t even need to be reported to the IRS.
The Master’s Rule – The Ultimate Tax Loophole
All credit for the tax exemption on fourteen nights or less of rental income in a primary residence goes to rich homeowners in Augusta, GA.
Every year Augusta, GA hosts this little golf tournament you may have heard of, called The Masters Tournament. Thousands of golf fans flock to this mid-size city along the Savannah River over four days in April to watch the best golfers in the world compete for a green blazer.
For years Augusta residents rented their homes at a premium to these tourists. When Uncle Sam tried to collect a share of this money the residents lobbied Congress to exclude these funds from their taxable income. Hence, the Master’s rule was born. It’s very simple. If you rent your home for fourteen nights a year or less, the income you earn does not need to be reported.
With the advent of short term rental platforms like Airbnb, this rule is no longer the domain of those who reside in Augusta, GA. Anyone, renters included, can take advantage of this crack in the tax code to make an uncapped amount of money by renting their space for a few nights per year.
Getting Started
In order to start earning tax-free income, the first step is to make the decision to list your space. Platforms like Airbnb, VBRO, and HomeAway make it easy to get started. Be sure to check the laws in your city as more municipalities are putting restrictions on short term rentals.
If you are a renter or live under a homeowners association be sure you are not violating any lease agreements or bylaws. Once you have the all clear, simply register for the platform, verify your identity (usually with a government ID), and create a listing for your place. To make sure you get set up properly, check out these ten expert tips for being a great Airbnb host.
Maximize Your Tax-Free Money
I got started as an Airbnb host soon after I purchased my condo. After showing a friend pictures of my newly decorated place he immediately suggested that I become an Airbnb host. Having just laid out a hefty chunk of my savings for the down payment, it didn’t take much convincing to get me to try it.
At the time Airbnb offered the service of a free professional photographer to take pictures of new hosts’ homes. Armed with great pictures and a vivid description of my home and neighborhood, it wasn’t long before the requests flowed in. I quickly learned a few lessons that helped me maximize my earnings.
1) If you are not going to host regularly, then list your entire place when you do.
Airbnb allows you to choose the option of listing a bedroom, a sleeping area, or your entire apartment. It’s up to you. If you are not keen on co-existing with strangers and travel for two weeks per year or less, it is in your best interest to list your entire space. Why? Because listing more space means you can charge more money.
While a single room can fetch anywhere from $50-$75 per night, an entire apartment or house can easily command upwards of $100. I charge $200 per night for the use of a two-bedroom, two bathroom condo in a trendy neighborhood and consistently book my place when I’m out of town. Be sure to check out similar listings in your area to make sure that you aren’t shorting yourself of additional money you could be earning.
2) List your place during peak demand times
Just like the Masters Tournament happens every year in Augusta, GA, many cities have annual events that attract a large number of tourists. Chicago, IL has Lollapalooza in August. Indio, CA is the home of Coachella Music Festival.
Even if your town does not host a major event every year there still may be one off occasions like The Big Game, All Star Weekends, or major conferences that will swing through. Check with your local convention center to see if they will be accommodating an event for 5,000 or more people. That’s a good time to take that vacation and leave your place open to guests.
Not only do peak times mean more people are looking for lodging, they also translate to visitors being willing to pay a premium for a place to stay. Take advantage of limited supply and high demand to charge a higher price for your space. Residents in Augusta, GA were making tens of thousands of dollars for listing their homes for under a week. Don’t feel bad about charging an extra $50-$100 per night for your place during these times.
3) Make use of up-charges
Many short-term platforms allow hosts to charge guests extra for certain needs. Airbnb allows you to charge guests a cleaning fee or require additional charges for guests in excess of a number you set. For example, my apartment can comfortably sleep four people between the two bedrooms. I also have a large couch and an air mattress. Because more people in my apartment usually leads to more wear, I charge an additional fee for each guest after the fourth person.
You can also set different prices for weekends and weekdays, thus capturing more money during higher demand days. Play around with the different levers you can pull to squeeze more income out of your listing.
The Fine Print
The Masters Rule is a great way to monetize your space with no tax implications. However, there are two things to remember before getting started. First, the tax exemption only applies if you host guests in your space fourteen nights a year or less. If you hit night fifteen all of the income you have earned becomes taxable and must be reported to the IRS. This could lead to a not so nice surprise when doing your taxes. Keep careful tabs on your nights. I like to plan mine in advance, with preference for high tourism times of the year.
Second, remember that even though you are not required to report income from Airbnb under 15 nights per year, platforms often send the IRS a 1099 for income paid to you. Since the IRS has no way to know how many nights you’ve hosted guests in your place, a number of hosts have been contacted in regard to the extra income for which no taxes were received. Don’t worry. Sending an explanation with proof of nights will easily clear up any confusion.
To ensure you can show your income is tax free you have to keep detailed records. Airbnb allows you to see all of your transactions by year. Simply go into your host account and pull up the transactions. Each guest’s check-in and check-out days are listed. Either print the page or take screenshots.
Final Thoughts
Taking advantage of the Masters rule is a great way to dip your toe into the pool of hosting a short-term space. Depending on your living accommodations and location, listing your space on a platform like Airbnb can bring in significant income that can be 100% yours to keep.
If you keep careful track of your days and plan the times you host to coincide with peak tourist times, you can easily earn thousands of dollars in additional income every year. Imagine how much faster you could pay off debt, save a full six-month emergency fund, or reach other financial goals with that much extra cash.
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Were you aware of the Master’s Rule? Have you considered becoming an Airbnb host? If you already list your space does this change your strategy? Leave your thoughts in the comments.
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interesting, thanks for sharing I’ll pass this post to a friend of mine :D
Thanks for reading. Hope your friend finds it useful.