I started my AirBnb (private bedroom/bathroom) in my home six months ago. So far it has been a wonderful, positive experience. My guests are polite, personable and tidy.
However, my son (who lives in populous, Airbnb oversaturated) Silicon Valley warned me that I should protect my personal assets should an Airbnb guest hurt themselves on my property. For example I have sloped landscaped with natural stone steps, as well as carpeted steps in my home leading to the bedroom. I’ve done everything I can to provide safety (lighting, clear description in my listing, etc.). But my son says there are people who make a career out of hurting themselves at AirBnBs just to sue the hosts and get a lot of money.
He suggested either consulting an attorney, or setting up a LLC (Limited Liability Company), or both. I have considerable personal assets and certainly would not want them compromised.
Has anyone else encountered this issue? Thank you for any response. Marie Wise.
Airbnb offers “host protection” and “host guarantee” although I don’t think it’s wise to rely on them.
Have you consulted with your insurance company to make sure your current insurance policy covers short-term-rental guests in your home? You need to ensure that it does and if not, get a new policy.
Hi Brian. I hadn’t considered that. I’ll check the details of our home insurance coverage. Thanks for replying! Marie
Sledgehammer to crack a nut… all you need is suitable insurance cover, which should carry a substantial public liability element.
John F is correct. Your home insurance plan may need to be adjusted to offer explicit protection as your home is currently being used a business as well. But creating an LLC will be a costly proposition that, unless you are generating $50k+, will cost more than it is worth.
Can you even put just part of a house into an LLC? We own a vacation home in the Caribbean and that is in a foreign LLC, which is owned by an S Corp in the US, with the shareholders being the family members. But I’ve never heard of a portion of a home being in an LLC. Maybe you set it up with the LLC subleasing the AirBnB portion of the house from you - but a lawyer would have to chime in to say whether that’s legitimate.
The problem with depending on insurance is that someone can go after you for more than your insurance covers, which still puts your personal assets at risk.
My wife has an LLC. It’s different by state, but the cost to file in Arizona is $50, and my city charges another $50/year to maintain a business licence.
Would there also be tax benefits for doing this?
I’ve been browsing various things online about what can be deducted as Airbnb expenses. There was a tidbit that mentioned something about being able to deduct a larger portion of your mortgage and property tax expenses if the business is under an LLC.
Researching this in more detail is on my to-do list.
We found our tax refund to be much less this year because the deductions for mortgage interest and property tax were significantly less than in previous years. Thanks, government!!!
Does any have details on this topic?
Setting up a LLC isn’t expensive. I should have clarified that my experience and judgement is from a taxation and business deduction standpoint- that you need a certain earnings threshold to make the time/accounting pay for itself in having a greater capability to deduct. And even that standpoint was formulated on the tax structure prior to the new law currently in effect. I guess if you are worried about endangering personal assets due to the potential in liability you should shop your insurance policies carefully and then also judge how much you want to be involved in an Airbnb style business and the likelihood of a very expensive claim coming your way.
My insurance has $2,000,000 in liability protection for guest claims. I am sure there is some crazy outlandish situation that could theoretically leave me exposed in some possible way, but I have had a difficult time envisioning that circumstance. I feel my insurance protection is sufficient.
Be careful, my homeowners insurance company started a non-renew process on me just for inquiring whether they had an insurance add-on for short term rentals.
I’m pretty sure it’s the same either way. For taxes, there’s no difference between doing business as a sole proprietor and a single-member LLC. My wife made the switch about 5 years ago.
Most regular homeowners insurance policies want nothing to do with any type of part time vacation rentals. My policy that gives me coverage to do rentals costs about 4x as much as my regular homeowners policy.
My understanding for deduction purposes is that if not LLC’d you can deduct the percentage of your occupancy from the expenses it takes to maintain your “business” (home). So if you are occupied 30% of the year you can deduct 30% of the expenses- since those are the nights you are “in business”. If you LLC you can then deduct 100% of expenses regardless of your occupancy rate. Though it requires different forms, filing, and accounting.
No, this is definitely not the case. Specifically, there’s no difference in what you can deduct for LLC vs. non LLC. And, for the specific deduction you are referring to is when the space is not 100% used for business. If, like the OP, you you have a private bedroom/bathroom and you use it ONLY for rentals and never for personal use, then you can deduct 100% of the expenses such as utilities for that portion of your property regardless of occupancy rate.
Let me pose a hypothetical. According to your understanding, as a sole proprietor you decide to rent your house out on weeks that you are on vacation and out of town. Let’s say you rent the whole house for 21 days/year. But, as a savvy entrepreneur, you keep all your days as “available” on your listing but with exorbitant rates intended to discourage bookings. Based on this- being “open for business” 365 days/year, but only acting as a business for 21 days, you’d get to deduct 100% of the following costs of your home from your tax liability:
-any home maintenance/upgrades/property management,
-any cleaning supplies or things arguably supporting your “business”,
-and anything else I didn’t just think of off the top of my head
This is a different scenario than just renting a room out. But fundamentally it’s the same thing. If your room for rent accounts for 30% of the costs associated with your house, and you deduct 100% of the expenses, you deduct 30% of the overall expenses you pay to have a home/run a business.
I am in no position to absolutely refute your assertion that be it sole proprietorship or LLC, that you can deduct 100% of costs invariably. But, I brought this exact same scenario to my tax accountant as I started to do a lot of Airbnb business and he was crystal clear that unless a distinct business entity is created that you can not deduct the costs of owning your home (when it’s acting as your home) as business expenses. And that in terms of a cost/benefit analysis of the work and reporting obligations of having an LLC, it would not be worth the savings of being able to deduct 100% of all costs until the renting income surpasses a certain threshold. I wish that was not true, but it would seem to pass the smell test of being the reasonable way for tax deductions to work- though I’ll admit that “reasonable” being a metric for analyzing how taxes work is a rare and usually useless standard.
Here is the article I mentioned:
OK, what you are describing is a 180-degree difference from the OP’s scenario. She has one bedroom and one bathroom in her home that she rents, and she wants to protect her personal assets. If she never uses the listing area for personal use, she can deduct 100% of the expenses associated with that part of the home because it is used exclusively for business (e.g. new carpet and furniture in the listing area) . For expenses that are shared over the entire home (such as utilities, mortgage interest, roof repairs, etc.), they are calculated base on the ratio of the size of the business-only portion of the house to the size of the whole house.
What you are describing is renting your entire home some of the time, living in it the rest of the time, and making the home a business asset of the LLC. The home would no longer be a protected personal personal asset, and you probably would have to transfer the title to the LLC and refinance it to avoid violating your mortgage contract. At that point, you can deduct all of the home expenses from the business income, BUT you would also have to report your personal use of the asset as personal income at fair market value, which would end up being a wash at best for most people.
@rangerjake - There is a limit on your deductions - you can’t deduct more than you receive in rent. You usually can roll forward those losses to offset rental income in the future.
The IRS is pretty smart about all this and has set rules in place to avoid the kind of scenario you described.
Note - my comments are based on US tax laws and may not be applicable to other countries.
My hypothetical is an extreme representation of a circumstance for the point of clarification.
We are definitely a little beyond the specifics of the OP scenario, as I am mostly justifying my statement of what one can deduct as a SP vs LLC and that there are circumstantial differences and not no difference as you indicated. Just like you indicated if you make the home an asset of the LLC there is a cascade of other requirements that negates value in being able to deduct 100% of expenses.
For the OPs circumstance in renting just a portion of their house it seems creating an LLC would not be an option as they would run into the same issue. But my understanding of the implications of renting a portion of the house is not complete as it is not a situation I have dealt with.
When I think of deducting 100% of costs I think of the full costs of having a house and being able to operate it to generate income- which is 100% of the costs of having a house, whether it is 1 room or the whole place. Obviously deducting 100% of the costs of a portion of the house is analogous to deducting a portion of the costs for the entire house. Which is kind of my point. An LLC can deduct everything, regardless of how much it is rented, a SP can only deduct the portion used for rental.
This is a fun parsing of minutiae but I think we are only serving to confuse the purpose of this thread. I will gracefully bow out of this conversation. Hopefully the OP can find a sensible path forward to protect her assets.
Read the policy, which most people never do. If it does not cover short term rentals, folks on this forum have previously warned against contacting your insurance agent to ask, because if short term rentals are not covered by the policy some folks have had their home insurance cancelled when they asked! Even asking can sometimes trigger this, even for folks that have not started BnBing yet. Some companies like Safeco provide short term rental coverage in some states but not others (apparently they do in Washington, but not where I live).
There are companies that provide supplementary short term coverage. If you search on the forum for “insurance” you should find a number of postings on this topic.
My attorney friends tell me that even if you have an LLC, it won’t always protect you from liability, especially if the plaintiff can prove neglect.