And that’s not to say that that is a bad thing… I’m actually excited about all of the opportunities that there are out there to make money.
The thing that has me worried is the shock that many people are going to receive when they file their taxes.
Well… often times when we partake in a new adventure that isn’t like our normal working environment, we tend to forget about how that new “side gig” is going to impact us on our taxes.
99.99% of the impact comes from the realization that having a side gig has now made us into a self-employed individual and we are now subject to self-employment taxes.
And not only are we subject to self-employment taxes, but our tax bill has increased, the refund is reduced or the balance due has increased – Yikes.
No worries, however…
The fact that you are here reading this right now indicates that you are doing your due diligence and preparing yourself for what’s to come.
Therefore, I have put together a short list of things that you will need to know and be aware of when you are engaged in the business of renting your personal property.
And before we get too deep into the concept of rentals…
I need to make sure that you understand that there is a huge difference between renting your personal property vs renting your personal residence.
If you need some insights about renting your home click here.
This particular post only covers the renting of your personal property.
Great! Let’s get to it.
You will need to determine if your rental activity is a business, nonbusiness or a not-for-profit activity.
I know right about now your like whaaaaat?
The reason we need to establish what type of rental activity it is, is because we will need to determine where to report the income and expenses on your tax return.
And according to the IRS:
In most cases it’s determined by:
The IRS also states: If your primary purpose is income or profit and you’re involved in the rental activity with continuity and regularity, your rental activity is a business.
As the IRS has stated, if you rent your personal property on a continuous basis and your goal is to make a profit, then they are going to consider it a business.
In other words, if you are renting your personal property with the intent of starting a business, then you will treat it as a business activity.
So, it will be assumed that if you list your property on such sites like Turo, Getaround or similar apps that allow you to rent your personal property, that you are in it to make a profit.
Beware, however, if you only rent your property sporadically through those apps, your income could be considered either nonbusiness or a not-for-profit activity. I’ll explain why that’s important in a minute.
For now, let’s just assume that your rental activity is a business.
Seeing that the rental activity would be considered to be an actual business… you will report the income and expenses on a Schedule C and you will pay self-employment taxes on the net income.
Because you are using a third party (the apps) you are most likely to receive a either a 1099-K or a 1099-Misc at the end of the year that will show you how much you earned.
If you received a 1099-K, then you are going to report the full amount of box “1a” as your gross income.
You may be tempted to subtract the fees that you incurred from the gross amount but don’t. You will deduct them later on part 2 of the Schedule C
If you received a 1099-Misc, you will report the full amount located in box 7 as your gross income. Again, you will be tempted to reduce that amount before you report it, but don’t as you will deduct them later.
Because you are renting your personal property, the first thing you are going to have to do is determine your business use percentage (BU%). This will let you know how much of your expenses you can deduct.
This is done by dividing the amount used for business by the total use of the property (business use ÷ total use = BU%)
So, for example, if you use the property 100% for business, you can deduct 100% of the expenses.
On the other hand, if you only used the property 30% for business, then you can only deduct 30% of the total expenses.
Glad you asked!
If you are renting your vehicle, the calculation is the same. You still have to determine your BU%. The only difference this time is that you are going to use the miles.
So when your vehicle is involved, the formula will look like this: Business Miles ÷ Total Miles = BU%
Once you have determined the BU%, you will have to make a choice as to which method you want to use as a deduction.
You have two choices:
Standard and Actual.
Using the Standard mileage rate, you will multiply your total business miles buy the applicable mileage rates for that tax year. Simple right?
And if you use the Actual rate, you will add up your total “actual” expenses (gas, tires, oil changes, repairs, etc) and multiply the result by the BU%.
So if your total actual expenses added up to be $2,500 and your BU% was 35% then you will only be allowed to deduct $875 (2,500 × 35%).
Please note, however, you can only choose one. You cannot use them both at the same time.
The term “nonbusiness activity” is a term that you have either never heard of or you only heard it because you are tax geek like me.
It’s weird right?
I mean either you are a business or you’re not.
Well… in the eyes of the IRS you could have the intent to make a profit, but not in the manner of an actual business. Thereby, making your rental activity, a “nonbusiness” activity.
In this case, you would be renting your personal property on a random or sporadic basis. Maybe you only do it when you need the extra cash or when the neighbor comes a asking.
In either case, it’s not on a continuous or regular basis, but there is still a profit.
So when it comes to your income and expenses, things are reported differently.
Your gross income will be reported on line 21 of the 1040 and the expenses will be reported as a “write in” adjustment on line 36 of the 1040 using the code PPR.
I don’t believe that, in this case, that you would receive any type of income statement (1099-K or 1099-Misc) due to the reporting requirements for each form. However, you still are required to report all your earnings.
So, if you rented your personal property through an app… I highly suggest that you log into that app to get the total amount of your earning and any fees that they may have charged you.
The good news about reporting the income this way is that the income is not subject the 15.3% self-employment tax. YAY!
The expenses, however, are still subject to the BU% as discussed above… so no cheating!
To make things simple… a not-for-profit activity is a hobby.
And I guess there is no better time to inject this… so i’ll just state this here:
If you are truly attempting to establish your company as a business… then you do not want the IRS to classify it as a hobby – the implications are horrible.
So, if you haven’t check it out already, I invite to watch my free 3 part video training, that goes into depth about Hobby vs Business and the ramifications that are involved. Click here to get to watching (but continue reading first).
Your activity will be considered a hobby simply if you don’t intend to make a profit but you do.
And if your activity is determined to be a hobby then your gross income will have to be reported on line 21 of the 1040 and the expenses will have to be reported on a Schedule A, but be limited to the amount of hobby income and the 2% limit on the Schedule A.
In other words – No Losses.
Let me give you an example:
Let’s say that you’re an artist and you have no intention of opening a gallery, but someone sees one of your paintings and wants to rent it for a show. You agree and rent the painting for $500 and your expenses to make the painting cost you $750.
The $500 will be reported on line 21 of your 1040. The expenses can only be deducted up the amount of the income, so $500.
Also, in addition to you automatically losing the $250 ($750 – $500), the $500 is subject to an additional limitation of 2%.
The 2% limitation or threshold is a number that must be met in order for the deduction to be allowed.
In order to get the threshold amount, you multiply line 38 of your 1040 (your adjusted gross income) by 2% and that will give you your threshold to cross.
If your adjusted gross income on line 38 was $50,000 then your 2% threshold would be $1,000 ($50,000 x 2%). In this case you would not get to deduct the $500 because it was not more than the 2%.
On the other hand, if your adjusted gross income was $20,000 then your 2% threshold would be $400 ($20,000 x 2%), therefore you would only be allowed to deduct $100 because it was only over the $400 by $100.
Consequently, if you don’t itemize or use a Schedule A at all – then the entire deduction is lost all together. And yes… you still have to claim the earnings.
Now you see why if you are truly a business, being classified as a hobby is a very bad thing.
I hope this has provided you with some clarity and understanding of what happens when you rent your personal property.
No more surprises – No you know.