Business OR INVESTMENT Travel CAN Create Tax-Free Income for YOUR Friends and Family

If you travel for business or investment purposes to where your family or friends live, then rent their guest room during your stay and deduct 100% percent of the cost and they will receive tax-free income.

Three Rules to Ensure Their Rental Income is Tax-Free

(1) 14 Day Limit on Renting

  • Friend or family member cannot rent more than 14 days during the year.[i]
  • Friend or family member cannot offset that rental income with rental expenses.
  • The lodging rented must be owned or rented by the friend or family member.

(2) More than 14-Day Personal Use Requirement

Your friend or family member must personally use the residence for more than 14 days during the year.[ii] This includes:

  • Primary residence.
  • Second homes or vacation homes.
  • Time-shares (which will be difficult to qualify unless the friend or family use the time-share for more than 14 days so that it qualifies as a residence).[iii]

(3) Fair Market Rental Rate

You must pay the commercial or fair market rental price.

  • The fair market rental price is the amount of rent someone would be willing to pay to rent the room.[iv]
  • Search for rentals in the area and find comparable listings to substantiate the rent you are paying. Airbnb is a good source for comparative rentals.

How to Report Your Business Lodging Deduction

  • Deduct the cost of business lodging as an ordinary and necessary business expense.[v] If rented for an investment expense, deduct for production of income.
  • No lodging deduction for personal travel days.
  • Submit a receipt or other proof of lodging expense. Pay by check.[vi]
  • If the total rent paid exceeds $600 during a tax year, you must report the total of the business rents via a Form 1099. You must give your friend/family member and the IRS a Form 1099.[vii]
  • Example of How to Report Your Business Travel: During the year, you stay at your Parents’ home for 10 nights while in town for business. Based on evidence, you can prove that their guest room is about equal to the local motel that rents for $100 a night. If you pay them $100 for 10 nights, you may deduct the $1,000 you paid for lodging. You must also complete the Form 1099-MISC that tells your parents and IRS that you paid $1,000 in rent that tax year.

How Your Friends and Family Report the Tax-Free Rental Income on a Tax Return

Using the above example, your parents must report the $1,000 they received from you on their tax return.

  • The IRS does not know the rent is tax-free until it sees the tax return.
  • Your parents must report the $1,000 rental income on their Schedule E. Because the amount is not taxable, they should subtract that amount in the expense section of Schedule E and add this supporting statement: “Taxpayers rented their personal residence for fewer than 15 days during the taxable year. The rental income was reported on a Form 1099 and is thus being reported as income on Schedule E. That rent is exempt from taxation under IRC §280A(g) and is thus removed with the offsetting expense entry on this Schedule E.”

How You Can Take Advantage of an Event in Your Area for Tax-Free Income

Rent your home or a room for events in your area.

  • Follow the 3 rules above to ensure the rent you receive remains tax-free income.
  • Price your home or room at the fair market value.
  • All rental days count towards your 14-day limit.[viii]

Beware of Sales and/or Occupancy Taxes

All the rules above apply for federal income tax purposes. But, there are tax collectors that specialize in short-term occupancy and sales taxes on hotels, short-term rentals (i.e., beach or ski properties) and transient lodging (i.e., lodging arranged by Airbnb, Homeaway, etc.).[ix]

  • Paying the occupancy tax adds proof of the room’s rental.
  • If you decline to pay occupancy tax, your local government may still demand the unpaid taxes and penalties.

[i] IRC §280A(g); Prop. Treas. Reg. §1.280A-3(b).

[ii] IRC Section 280A(d)(1).

[iii] Prop. Reg. 1.280A-3(f)(4).

[iv] IRC Section 280A(d)(3)(A).

[v] Reg. Section 1.162-2(a).

[vi] Reg. Section 1.274-5(c)(2)(iii)(A)(1).

[vii] Reg. Section 1.6041-1(a)(2).

[viii] Roy v Commr., TC Memo 1998-125.

[ix] http://www.nytimes.com/2015/06/17/your-money/lodging-taxes-and-airbnb-hosts-who-pays-and-how.html?_r=0.