Are All Short-Term Rentals (Airbnb) Deemed to Constitute Self-Employment Income?

Are all short-term rentals, such as Airbnb, deemed to constitute self-employment income? The Chief Counsel Office recently addressed this issue in CCA 20215100. It reiterates that short-term rentals are not deemed, per se, self-employment (SE) income. Therefore, that leaves an opening for escaping SE tax in some instances. It really depends on if the owner is engaged in the activity as part of their real estate dealer activities in operating the short-term rentals. If the owner would not be deemed to be a dealer, then Treas Reg 1.1402(a) provides an out from SE tax. However, please note that this is contingent on not providing material services along with the short-term rentals. The CCA indicates that the services need to be rendered to maintain the space in a condition for occupancy, not services that would be deemed to generate a material part of the rental fee due to the services being provided. It was interesting to note that in the example which included daily maid services, the activity was classified as subject to SE tax. However, in the example that provided cleaning services only between guests stays, those rentals were not deemed to be subject to SE taxation.

In trying to clarify what activities result in classification of being a dealer for self-employment tax implications, let’s look directly at an excerpt from the Reg. § 1.1402(a)-4 Rentals from real estate.

(a) ……… In general, an individual who is engaged in the business of selling real estate to customers with a view to the gains and profits that may be derived from such sales is a real-estate dealer. On the other hand, an individual who merely holds real estate for investment or speculation and receives rentals therefrom is not considered a real-estate dealer. Where a real-estate dealer holds real estate for investment or speculation in addition to real estate held for sale to customers in the ordinary course of his trade or business as a real-estate dealer, only the rentals from the real estate held for sale to customers in the ordinary course of his trade or business as a real-estate dealer, and the deductions attributable thereto, are included in determining net earnings from self-employment; Thus, it is extremely important to really understand your business model and establish your services in conjunction with your rentals from the start to avoid income being recharacterized during a possible examination.