Home ownership has a lot of demonstrated value from an investment standpoint, with equity, tax breaks and the opportunity for owners to rent out spare rooms all pitching in. But the gig economy—which has disrupted traditional economic models, slashing costs in industries such as hospitality (Airbnb, Homeaway, etc) and transportation (Uber, Lyft, etc)—has opened up money-making opportunities for renters, too.
And that’s a good thing, because quite a few people are renting these days. A recent analysis by the Census Bureau found that in 2016, 37% of households were renters, the highest percentage in over 50 years. But happily, you don’t need to actually own real estate to profit from it.
Renting while renting
Just like homeowners, renters can tap into the short-term rental market through Airbnb. Of course, it helps if you’re on good terms with your landlord, and there are other concerns to consider. Namely, liability insurance. Not just for you, but for your landlord.
Also regarding short-term rentals, many cities are beginning to define what’s allowable, and what’s considered “short-term.” If you’re a renter in a large city, or even a small quaint popular destination, chances are your local government has addressed the short-term rental issue in some official fashion. Get educated on the legal landscape in your area.
The Internal Revenue Service, naturally, has taken note of the situation. Perhaps surprisingly, they’ve landed in your favor.
“The tax code favors homeowners, and it’s trickier for renters,” notes Matt Browne, an enrolled agent from the office of certified financial planner and former IRS employee Howard Choder. But, Browne adds, you don’t have to be a homeowner to qualify for property-related tax deductions.
Say you’ve got a spare bedroom in the apartment you’re renting, and you’re not using it for anything. And your landlord is okay with you renting it on a site like Airbnb. But you need to buy a bed and some additional furnishings to put it to use as a bedroom. “Those expenses qualify for deductions,” Browne said.
In fact, those expenses can go up to $2,500 worth of deductions in a given tax year. You may have heard the phrase “safe harbor” before—it refers to an investment used by a business to “acquire, produce, or improve tangible property.” So that new bed you need in order to convert that spare room to an Airbnb listing is, thus, totally eligible for deductions.
Getting your landlord to buy in
But don’t count those eggs before they hatch. Speaking directly with your landlord about your plans is essential.
“I would approach a request from my tenants with a lot of questions,” says Alan Chitlik, a Seattle wedding DJ by day and a landlord 24/7. “And my first inclination would probably be to say no,” he adds.
“I’ve personally screened each of my tenants, but it just feels like more of a risk to me to have a whole bunch of unknown people in the house,” Chitlik said.
However, he wouldn’t rule out the possibility of a tenant venturing into Airbnb territory. He’d just want a clear understanding of how it would work.
“Leases are mostly full-year, but I’ve had some renters who are students and weren’t going to stay the summer. And that does happen to be the time of year when Seattle has the most visitors,” Chitlik said. “So I’d at least talk to them about it and hear what their ideas were.”
Regarding the financial side of the equation, Chitlik noted he would work with his tenants on an appropriate rent, and let them handle all the related marketing. Given those parameters, if they did all the work, Chitlik said, “It seems like the revenue should be theirs.” Hopefully your landlord would feel the same.
Other money-making opportunities for renters
Admittedly, the Airbnb approach isn’t for everyone. Not to worry: there are other ways you can profit from the space you inhabit, even as a renter:
Extra spaces: If you aren’t using your allotted storage space in your apartment building, consider renting it out. Likewise, if you have a parking spot you’re not using, you can list it for rent on Spot, at a rate and schedule of your choosing—by the day, week, or month. And if you lease a house in a car-crowded neighborhood, you can even rent space in your driveway.
Bikes and boards: Moreover, if you’re like a lot of renters, you likely have a bunch of gear that’s not being used. Like a bike that’s collecting dust. List it on Spinlister, which lets people rent bikes anywhere in the world. The service also offers protection options and delivery services. In fact, listers’ bikes are protected up to $10,000.
Spinlister also accommodates owners of surfboards and snowboards. No need to let those moneymakers collect dust between your occasional adventures.
Camera gear: With KitSplit you can rent the camera equipment you probably aren’t using most of the time. Even if your gear is worth a modest $500, KitSplit calculates you could earn your money back renting it out one weekend each month. Use their calculator to determine your potential earnings.
Hotspots: And just how speedy is your internet connection? Speedy enough to share—in exchange for free access wherever you go? Fon emerged in 2006 as a pioneer in residential Wi-Fi sharing. By the end of 2016, Fon claimed to host 20 million hot spots around the world.
Package delivery: Planning a road trip and want to earn a little gas money? You can use Roadie to deliver packages along your route regardless of what you drive.
Home office: Do you work from home? Then you should know that renters are eligible to claim a home office deduction the same way homeowners can by meeting the following requirements:
- You do most of your work at home, even if you occasionally park at the neighborhood coffeehouse.
- You have a dedicated workspace—even a corner of your modest studio apartment.
- You pay the expenses yourself, and are not reimbursed by an employer.
“Even your studio apartment can have a dedicated office space,” Browne says, as long as it truly is a space dedicated to your office. “Lounging on your couch with your laptop doesn’t qualify,” he adds, if your couch isn’t specifically in a dedicated office space.
In the case of homeowners, expenses like real estate taxes are on the list of what’s deductible for a home office. Which, of course, is useless if you’re renting. But as a renter, payments to your landlord qualify, as do expenses like renter’s insurance, utilities, security systems, internet, and even a secondary, business-use phone.
More tax tips
And here’s another tax tip for renters: the Internal Revenue Service allows exemptions for many short-term scenarios. If you want to earn money, tax free, while you’re off on vacation, you can rent your apartment for up to 14 days, per Title 26, Section 280A of the tax code.
Browne also highlighted sales tax deductions as another way renters—and everyone—can benefit. Thanks to the Protecting Americans from Tax Hikes, or PATH, Act of 2015, sales taxes can be claimed if you itemize deductions on your federal return.
Browne noted this is particularly beneficial for people who live in states without an income tax, such as Washington, where sales taxes tend to be higher to make up for the money the state can’t make by taxing residents’ income.
However, if you live in a state that collects a state income tax, you must decide if the sales tax deduction will benefit you more than the allowable state income tax deduction. You can take one or the other, but not both. So, for example, if you purchased a car or major appliance, the sales tax deduction may save you more.
As always, if you can’t figure out what income is taxable and what qualifies for a deduction, a tax attorney can help you sift through the legal minutiae. So don’t let the dense tax code deter you: with rents on the rise in many places, there are a lot of ways to ease the pain.