Tax Free Rental Income . . . Be Careful!

It is one of the tax code’s best freebies: a provision allowing people to rent out their homes for fewer than 15 days a year and pocket the income tax-free. The break is often called the Masters exemption because of its popularity in Augusta, Ga., during the famous April golf tournament. Now services such as Airbnb, HomeAway, Onefinestay and FlipKey are making it easier for people to take advantage of the Masters exemption by offering short-term rentals of their homes. But this boon also is putting some so-called hosts on a collision course with the IRS. The problem is that some firms are required to send 1099 forms to both the taxpayer and the IRS indicating how much income the taxpayer earned from renting through them. Yet there isn’t an easy way for a host who rented for fewer than 15 days to tell the IRS such income was tax-free. IRS Publication 527, Residential Rental Property, says that taxpayers don’t need to report such income at all. As a result of these conflicting rules, some taxpayers who act as hosts may get computer-generated letters from the IRS in a year or so asking about tax on their hosting income—even though no tax is due on it.  The hosts will then need to prove that the income was tax-free.

Wall Street Journal  April 4, 2015

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