Rental property can provide significant tax benefits. But leases of 30 days or less may be taxed at a higher rate. So, make sure you plan your rentals and your taxes, and your short-term rental tax for the new year!

In the year 2021, rental properties are likely to be subject to a few changes in tax law that will impact short-term renters.

The key changes concern the Alternative Minimum Tax (AMT) and the treatment of Airbnb and other sites that allow short-term rentals.

When must I pay AMT?

Under current tax law, if you have losses from a rental property that are effectively connected with a trade or business, you may be able to deduct them to reduce your tax liability. The Internal Revenue Service (IRS) has created special rules for certain taxpayers based on their income levels, such as married taxpayers who file jointly with no dependents. But for most people, there are no special rules about whether they should pay the AMT, which is a higher effective tax rate they must pay on certain kinds of income.

When filing tax returns for the year ending December 31, 2022, everyone is likely to be required to pay the AMT if they have certain kinds of losses from passive activities. There are special rules, though, for rental real estate and qualified personal residences. If you own rental property or live in a home that you rent out part of the time to someone else, you may not be subject to AMT on the profits from those properties.

One reason that the AMT was created in 1969 was to prevent wealthy taxpayers from using loopholes and other techniques to avoid paying taxes. The AMT was intended to target expensive homes in expensive cities. But because it is very complicated, many people not familiar with the tax code have avoided it altogether. In other words, there are many people who don’t know they could be subject to the AMT. It’s important that you know how to find out if you qualify for this higher rate of tax on rental property income.

A special form, Schedule D-4, would be required to report rental real estate income that is not subject to the AMT. This form would require you to estimate your rental income for the entire year. After you have figured out how much rent you expect to collect in a year, you will need to put in the hours to figure out when your income is subject to or not subject to AMT. For example, if you rent a unit out for 30 days in a year and otherwise don’t use it, that 30-day period does not count as a rental time period. Some of the income will be subject to AMT while other units are exempt.

This form can be complicated, but it could also be worth your while to pay an accountant to help you and a tax advisor to review your math and calculations.

What do I need to do?

If you own rental property in 2021, then you will need to decide whether or not you plan on renting out your property or staying put in the year ending December 31, 2022. If you sell the property and get a profit, that income is likely subject to AMT if it is more than $25,000 for joint filers without dependents or $50,000 for individuals. You will also need to figure out whether or not the property is subject to AMT. There are generally no credits you can take for AMT or short-term rental tax. It is simply a higher rate of tax.

If your property is subject to the AMT, you will need to fill out the Schedule D-4, Form 6251, and fill it with your federal tax return in the year ending December 31, 2022, so that you can calculate how much to pay in taxes. The rules for how to report this income on Form 6251 are complicated. If you’re interested in learning more about these developments and how they may impact you, we recommend contacting a qualified tax advisor for assistance with calculating and filing your taxes in 2021 and 2024.

What if I don’t use the property?

There are some special rules and exemptions for rental properties that aren’t used. If a property isn’t used at all for business purposes in the year, then that might be exempt from AMT. You should consult with your tax advisor about how to determine whether or not your property is in fact exempt from AMT and report it correctly on your taxes. If you can prove that the property was not used at all for business purposes, then you may be entitled to deduct all of your rental income and losses from passive activities.

What if I rent the property out for a short period of time?

If you rent out your property for 30 days or less in a year, then you need to pay tax on the income at the highest rate of AMT. (This is in addition to any regular income taxes.) You cannot deduct the losses from other passive activities, either. So, if you are making money on your rental property and other passive activities, but don’t collect enough in rent to cover your expenses and losses, you may still be required to pay tax on that income at the highest rate of AMT.

What if I rent out the property full-time for more than 30 days?

If you rent out your property at least half of the time during the year, then that is considered a “principal residence” and you won’t be required to report that rental income on Schedule D-4. So, you cannot deduct the losses from other passive activities. And if you have losses from a rental property that are not subject to AMT or don’t exceed $25,000 for joint filers without dependents or $50,000 for individuals, then you won’t report them on Form 6251.

If you rent your property out at least half of the year but less than half of the time, though, then you will still be required to report your rental income on Form 6251. And if you have losses from a rental property that are not subject to AMT or don’t exceed $25,000 for joint filers without dependents or $50,000 for individuals, then you will report them on Form 6251.

What if I get a profit from renting out my principal residence?

If you rent out your principal residence for 30 days or less in a year and get a profit from it, then that income is not subject to the AMT. And if your losses from a rental property that are not subject to AMT or don’t exceed $25,000 for joint filers without dependents or $50,000 for individuals, then you will report them on Form 6251.

What about the pass-through deduction?

The tax reform bill did away with the pass-through deduction in 2018. So starting in 2019, rental income that is subject to AMT is no longer eligible for the 20 percent pass-through deduction.

Is my rental property now subject to the AMT?

The rules that apply to your rental property are specific to your individual circumstances. If you own rental properties, then you will need to consult with a qualified tax advisor who can help you determine which capital properties and income are subject to the AMT so that you can accurately report rental income on Schedule D-4.

If you have additional questions, including about how to find out if your property is subject to AMT, how the rules differ for joint filers without dependents versus single filers, or if there are other exceptions or exclusions, we recommend contacting a professional tax advisor.

What if I do nothing?

If you are not otherwise required to file a return for income earned that is subject to AMT, then you will have nothing to file on your return. If you are expecting a refund, then you won’t receive a refund because of the AMT; rather, your tax liability will be increased. Be advised: the IRS can audit taxpayers for up to three years after they file taxes—that is, even after the period when the AMT actually applies. The IRS can audit you in order to ensure that you paid the correct amount of AMT.

For more information, you can visit Real Estate Calculators.