Capital gains tax when I sell my home if I use a portion of it for an AirBnB

Question

We live in Virginia. We own a nice-sized home and now that the kids are gone we are living on one floor, except for the laundry room. We are considering renting out the downstairs as an AirBnB space. I have been told that when we sell the home we would no longer be eligible for the capital gains exemption on the sale of our home since it was also used as a business. I have also read that we could possibly lose the exemption for the portion of the house that was used as a business (approx. 40% of the home). Please comment on what you know about the tax laws for this in the US and also, Virginia. Thanks!

Answer 1

Getting the first year right for any rental property is key. It is even more complex when you rent a room, or rent via a service like AirBnB. Get professional tax advice.

For you the IRS rules are covered in Tax Topic 415 Renting Residential and Vacation Property and IRS pub 527 Residential Rental Property

There is a special rule if you use a dwelling unit as a personal residence and rent it for fewer than 15 days. In this case, do not report any of the rental income and do not deduct any expenses as rental expenses.

If you reach that reporting threshold the IRS will now expect you to to have to report the income, and address the items such as depreciation. When you go to sell the house you will again have to address depreciation. All of this adds complexity to your tax situation. The best advice is to make sure that in a tax year you don't cross that threshold.

When you have a house that is part personal residence, and part rental property some parts of the tax code become complex. You will have to divide all the expenses (mortgage, property tax, insurance) and split it between the two uses. You will also have to take that rental portion of the property and depreciation it. You will need to determine the value of the property before the split and then determine the value of the rental portion at the time of the split. From then on, you will follow the IRS regulations for depreciation of the rental portion until you either convert it back to non-rental or sell the property.

When the property is sold the portion of the sales price will be associated with the rental property, and you will need to determine if the rental property is sold for a profit or a loss. You will also have to recapture the depreciation. It is possible that one portion of the property could show a loss, and the other part of the property a gain depending on house prices over the decades.

You can expect that AirBnB will collect tax info and send it to the IRS

As a US company, we’re required by US law to collect taxpayer information from hosts who appear to have US-sourced income.

Virginia will piggyback onto the IRS rules.

Local law must be researched because they may limit what type of rentals are allowed. Local law could be state, or county/city/town. Even zoning regulations could apply. Also check any documents from your Home Owners Association, they may address running a business or renting a property.

You may need to adjust your insurance policy regarding having tenants. You may also want to look at insurance to protect you if a renter is injured.