Most people that I talk to about Airbnb agree that it’s a cool concept. Now that Airbnb has become pretty mainstream, my guess is that most of you have used it before or at least know someone who has. At this point, I think it’s probably more surprising to find someone who doesn’t know what Airbnb is. (And if you’re someone who somehow doesn’t know what Airbnb is, sign up using my link in order to get $40 off your first stay).
Even though there are a ton of people using Airbnb on the guest side, the majority of people I talk to are understandably hesitant about actually hosting guests on Airbnb. I definitely understand the concerns – they’re ones I still think about as an Airbnb host. My biggest fears are having someone steal from me or otherwise mess up my house. Luckily, nothing like that has happened to me yet.
Even though I know that most people won’t sign up to be an Airbnb host, I still always try to convince people to at least give Airbnb hosting a shot. My rationale is that you don’t need to do it all that time. Instead, you can just try it out a few times and see what it’s like. If it’s too weird for you, you can just deactivate your listing. At most, you lose a bit of your time. But I think even people who are weirded out by having a stranger in their house can handle hosting someone in their home for just a few days per year. Why not challenge yourself and see?
And if you’re still not convinced about trying your hand at Airbnb hosting, consider this. Because of a weird little exemption in the tax laws, if you host on Airbnb for just a few days per month, the government allows you to collect all of that income, tax-free.
Tax-Free Airbnb Income Via The Masters Rule
You’re probably wondering how you can legally collect Airbnb income tax-free. Under our federal tax code, the general rule is that any income you earn is taxable. Thus, for the most part, any income you earn on Airbnb is subject to federal and state taxes. Depending on how much you make, it can be a huge chunk of change coming out of your earnings.
The “Masters” rule or “Masters” exemption, however, is a unique provision in the tax code that allows you to earn any amount of rental income without paying any federal taxes on it. It doesn’t matter whether it’s just a few bucks per year or thousands of dollars. If you fall within the provisions of the Masters rule, all of that income comes to you, tax-free.
The origins of the rule stem from the Masters Golf Tournament in August, Georgia. For those of you who don’t know, the Masters is like the Super Bowl of the golf world. Folks who live near the golf course can often bring in upwards of $25,000 just for renting their home out for a few days during the tournament. Naturally, the folks who lived in this area didn’t want to have the pesky government snagging a piece of their earnings. And luckily for them, they had the wealth and clout to lobby congress to give them a favorable tax break. The good thing is that a tax break for them also means a potential tax break for us.
Under the Masters Rule, anyone can rent their home out for 14 days or less and pay zero federal taxes on those earnings. Before the rise of Airbnb, the only people that could really take advantage of this tax break were folks who lived in very desirable areas like Augusta. As a result, the Masters rule has remained relatively obscure with very few people taking advantage of it. Now, however, with Airbnb becoming so mainstream, any one of us can conceivably use this rule to snag ourselves a little bit of extra, tax-free income.
Take Advantage of Tax-Free Money
The great thing about the Masters Rule is that it allows you to try your hand at something like Airbnb and see if hosting is something you can do. The Masters Rule doesn’t require you to rent out your home on consecutive days. Instead, you can space out your rental days over the course of the year. So long as you don’t rent out your home for more than 14 days in a year, you’ll still fall under the Masters Rule exemption.
14 days might not seem like all that much, but it’s income that can add up over time depending on the desirability of your neighborhood and the type of accommodations you’re offering. Take a look at a chart I found on Smart Asset listing the average nightly prices for guest rooms on Airbnb in various US cities:
Someone renting out a spare bedroom in Chicago, for example, can easily pull $1,000 per year completely tax-free. This amount can obviously be much higher if you’re more selective and only make your room available during high demand periods (think of renting out a guest bedroom during big conferences, sporting events, and the like).
If you’re more daring, you could potentially make your entire home available for 14 days per year and bring in much more money. And if you’re someone who lives near a unique major event like the Masters, you could obviously bring in thousands more dollars in tax-free income. My guess is that anyone living in a respectably sized city probably has an event like this at some point in a year.
If you’re not sure if you’re comfortable with Airbnb, my challenge to you is, why not try it for 14 days in a year and see what hosting on Airbnb is like? 14 days comes out to about 2 days per month. If you’re like me, you’ll have a check-in time somewhere in the late afternoon and a checkout time sometime before noon. In many instances, someone staying for 1 night might arrive sometime in the evening, sleep in your home, then leave first thing in the morning. I often barely even notice my guests are around.
Using The Masters Rule To Turn A Roth IRA Into A Triple Tax-Advantaged Account
The interesting thing is what you can do with that tax-free money. Most people will probably just take that money and use it to buy things they want. Maybe use it for a vacation or for a home renovation or something else like that. I don’t think there’s anything necessarily wrong with that.
But what if we think outside the box a little bit. Imagine using this tax-free Airbnb income to fund your Roth IRA, for example. If you took this route, you can essentially take tax-free income, use it to fund at least some of your Roth IRA, then take that money out again in the future, tax-free.
We know that the HSA is one triple-tax advantaged account (i.e. money goes into the account pre-tax, grows tax-free, and can be withdrawn tax-free). If we utilize the Masters Rule, it could potentially be possible to turn the Roth IRA into a second triple tax-advantaged account! Obviously, in order to do this, you’re going to need to earn at least some taxable income in the year as well, but most of us already do this by necessity anyway.
Imagine how much your Roth IRA could be worth if you could somehow pull in $5500 per year renting out your home on Airbnb for 14 days or less . Obviously easier said than done, but potentially possible depending on where you live and what type of space you’re renting out. We at least know that folks in Augusta are able to do this.
Even $1,000 per year (which I think almost anyone can do), can turn into $100,000 of tax-free Roth IRA money. That’s not a bad deal.
Things To Remember
We do need to remember a few things if we’re going to take advantage of this tax exemption:
- You’ll probably owe state taxes. The Masters Rule only applies to your federal income tax. My guess is that most states don’t have a similar exemption. Make sure you check to determine what you might owe to your state taxing authorities.
- You can’t deduct anything. If you’re going to take advantage of the Masters Rule, remember that you can’t deduct your Airbnb expenses from your taxes. This makes sense. If you’re not paying taxes on the income, the government isn’t going to let you reduce your already non-existent taxes by taking deductions.
- Keep good records. The IRS says that if you rent your home out for 14 days or less, you don’t even need to report it to the IRS. In practice, this basically just means the IRS never even knew you made that income. Airbnb, however, is required to send tax forms to the IRS. As a result, if you’re taking advantage of this rule, you’re probably going to get something from the IRS asking you to explain yourself, since the IRS can’t tell how many days you rented your house. All you need to do is explain that you rented your home for 14 days or less and make sure you have all the documentation to prove it.
- Once you rent for more than 14 days, all of that Airbnb income becomes immediately taxable. This is really important. If you’re going to take advantage of the Masters Rule, you have to make sure that you don’t rent out your house for more than 14 days. Once you hit that 15th day in the year, all of that income becomes taxable.
Takeaways
Not everyone is going to be in a position to make $25,000 per year like those people renting out their homes in Augusta. But I think everyone with a spare room in a decently desirable area can probably make $1,000 or more per year just by renting out that room for 14 days or less. 14 days in a year is a tiny amount of time. It basically comes out to 2 days per month. I think almost anyone can handle hosting someone just 2 days per month.
There aren’t a ton of ways to get tax-free income in the United States. The Masters Rule is definitely not a tax exemption that the government expected a lot of people to be able to take advantage of (hence why it exists at all). But with the rise of short term rental platforms like Airbnb, every single one of us can take advantage of this tax exemption pretty easily. The fact that you could also use this income to turn at least some of your Roth IRA into a triple tax-advantaged account makes this tax exemption even more interesting.
The government didn’t mean to do this, but when you think about it, it’s almost like they wanted us all to try our hand at being an Airbnb host.
If you think you might want to take advantage of some tax free Airbnb income, then you should definitely sign up to be an Airbnb host using my referral link. Plus, if you use my link, Airbnb will give you a bonus $50 once you host your first guest.
What do you think? Does the idea of hosting on Airbnb appeal to you a little more if you know that you can try it out and pay no taxes on that income?
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More Recommended Ebike/Scooters
Check out these other ebikes and scooters I've reviewed:
- Urban Arrow Ebike – Last year, I made one of the largest purchases I’ve ever made – I bought a $9,000 electric cargo bike from Urban Arrow. In my Urban Arrow review, I will discuss what it is and why I decided to buy this bike, as well as discuss how impactful a bike like this can be on your journey to financial independence.
- Troxus Explorer Step-Thru Ebike – The Troxus Explorer Step-Thru is a fat-tire ebike that I’ve had the pleasure of riding for a while now. It has amazing power, great looks, and awesome range. If you’re looking for a great fat-tire ebike that offers a lot for the price, the Troxus Explorer Step-Thru is definitely one for you to consider. Check out my Troxus Explorer Step-Thru Review.
- Hovsco HovBeta Ebike – The HovBeta is a folding ebike with great specs and a lot of interesting features, and importantly, it’s sold at a good price point. I’ve had a blast commuting with it and using it to do deliveries with DoorDash, Uber Eats, and Grubhub. Check out my Hovsco HovBeta Ebike Review.
- Vanpowers Manidae Ebike – The Vanpowers Manidae is a fat tire ebike that I’ve been riding as my primary winter commuting bike and have also been using it to do food delivery with apps like DoorDash, Uber Eats, and Grubhub. After clocking in a decent number of miles with this ebike, I wanted to write a post sharing what my experience with the Vanpowers Manidae ebike has been like. Check out my Vanpowers Manidae Review.
- Sohamo S3 Step-Thru Folding EBike Review – A Great Value Folding Ebike – The Sohamo S3 Step-Thru Folding Ebike is an entry-level folding ebike that offers a lot of value for the price point. I’ve been riding the Sohamo S3 for a while now, putting the bike through its paces, and I have to say, this bike has exceeded all of my expectations. Check out my Sohamo Review.
- KBO Flip Ebike – The KBO Flip is an excellent bike. I’ve had a great time riding it and think it’s a versatile bike that can be used for a lot of purposes and can fit a variety of lifestyles. It’s worked out great for me as a general commuter bike and as a food delivery bike. Check out my KBO Flip Review.
- Hiboy P7 Commuter Ebike – The Hiboy P7 is an excellent electric commuter bike that’s offered at an affordable price point. The range and speed of this bike are both very good, so you won’t have any trouble getting anywhere you need to go with it. As a food delivery vehicle, this is also good – with how much range it offers, you’ll be able to work all day on a single charge. Check out my Hiboy P7 Commuter Electric Bike Review.
- Himiway Escape Ebike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Ebike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Varla Falcon Scooter – The Varla Falcon is an excellent scooter that offers a good amount of power at a lower price point compared to more powerful scooters. It’s not exactly an entry-level scooter, nor is it a high-powered scooter. I think it fits somewhere in-between those two categories – an intermediate scooter if I had to give it a category. Check out my Varla Falcon Review.
- Hiboy S2 Scooter – The Hiboy S2 is an excellent entry-level commuter scooter that's perfect for someone looking to save some money in transportation costs and improve their commute. Check out my Hiboy S2 Review.
- Hiboy S2R Scooter – The Hiboy S2R is one of the more interesting electric scooters I’ve been able to test out. It’s not a high-powered scooter, but for an everyday transport option, it’s very useful, especially given some of the unique features that it has. Indeed, for the price, the Hiboy S2R might be the best value scooter I’ve used. Check out my Hiboy S2R Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
- M1 Finance ($100) – This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account. Check out my M1 Finance Referral Bonus – Step-By-Step Guide.
- SoFi Invest ($25) – SoFi Invest is an easy brokerage account bonus that you can earn with just a few minutes of work. Use my SoFi Invest referral link, fund your SoFi Invest brokerage account with just $10 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.
- Webull (20 free stock shares) – Webull's current promotion gives you 20 free shares valued between $3-$3,000 each if you open an account using my referral link. Here’s a guide I wrote about how to earn your free shares using Webull.
- Moomoo (15 free stocks) – Moomoo is a free investing app currently offering 2 different referral bonuses if you open an account using a referral link. Read my Moomoo referral bonus guide for more information.
- Robinhood (1 free stock) – Robinhood gives you a free stock valued between $2.50-$225 if you open an account using my referral link.
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More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- SoFi Money ($325) – SoFi Money is a free checking account from SoFi. They’re currently offering a $25 referral bonus if you open a SoFi account with a referral link and deposit $10. You can also make an additional $300 as well if you complete a direct deposit. This is a good bank that is also 100% free, so you won’t have to worry about managing this account. Here’s a post I wrote with instructions on how to earn your SoFi Money bonus: SoFi Money Referral Bonus: Step By Step Guide.
- Upgrade ($300) – Upgrade is a free checking account that’s currently offering a $300 referral bonus if you open an account and complete a direct deposit. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Here’s a post I wrote with more details: Upgrade $300 Referral Bonus – Step By Step Directions.
- Fairwinds Credit Union ($175) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
- Chime ($100) - Chime is a free bank account that offers a referral bonus if you use a referral link and complete a direct deposit of $200 or more. In practice, any ACH transfer into this account triggers the bonus. This bonus is easy to earn and posts instantly, so you’ll know if you met the requirements as soon as you move money into the account. I wrote a step-by-step guide on how to earn your Chime referral bonus that I recommend you check out.
- US Bank Business ($800) – This is a fairly easy bank bonus to earn, since there are no direct deposit requirements. In addition, you can open the Silver Business Checking account, which comes with no monthly fees. Check out how to earn this big bonus here.
- Fifth Third Bank ($200) – This offer is limited to customers in the following states: Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, West Virginia, and South Carolina. If you don’t live in one of those states, you won’t be able to open an account online but you can still open an account in-branch if you happen to be visiting a city that has a branch. This is a fairly easy bank bonus to earn, especially since there are plenty of data points showing what will trigger the direct deposit requirement. In addition, you can open the Fifth Third Momentum Checking bank account, which comes with no monthly fees or minimum balance requirements. Read my guide on this bonus here.
- GO2Bank ($50) - GO2Bank is an easy bank bonus that I recommend people take advantage of if they have an easy way of meeting the direct deposit requirement. I like that it’s easy to open the account and that the bonus pays out quickly. Check out my step-by-step guide on how to earn your GO2Bank $50 referral bonus.
- Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link. Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
- Novo Bank ($40) - Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. In addition to being a good bank bonus, Novo is also a good business checking account. It has no monthly fees or minimum balance requirements and operates a good app and website. Indeed, it’s the business checking account I currently use for this blog. Check out my post on how to easily open a Novo account.
- Varo ($25) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $25 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $300 if you complete a direct deposit.
- 5% Savings Accounts. I'm currently getting 5.24% interest on my savings through a company called Raisin. Opening a Raisin account takes minutes to complete, it's free, and all of your funds are FDIC-insured. I explain how it works, why I'm now using it to store my emergency fund and any other cash savings I have, and why I recommend everyone check it out in this review.
- US Bank Business. US Bank is currently offering new business customers a $800 signup bonus after opening a new account and meeting certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account.
- Empower. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
This is a pretty interesting idea – renting your home out for 14 days or less to get tax free income – and then fully funding your Roth IRA with the income. Love hacking your way to a fully funded Roth IRA with side income!
My brother just mentioned the Master’s rule to me last night, that he and his wife were going to cap their Airbnb rentals at 14 days this year to just get the tax free income, and so they didn’t have to worry about claiming it on taxes. They rented their house out during the Final Four – and a couple of other big events this year and made some decent money. The question is – the income is tax free for federal taxes, but what does the state of Minnesota do – do they have a similar rule for state taxes, or are you on the hook for MN taxes?
You’re still on the hook for state taxes. It’s just a federal income tax break.
Does the IRS count the actual days of an Airbnb reservation or the number of nights stayed? Example: Most of my rentals in 2018 were people checking in Friday evening and checking out Sunday morning. Airbnb always uses the language of 2 nights, not 3 days.
My husband and I actually put our entire home up on Home Away and Airbnb and we got a few queries from wedding parties and families looking to rent for a local college’s graduation. We also got requests from families looking to rent out the home for the summer. This was a few years ago before we were more FI adventurous. It would have required us to move for a few months and we weren’t willing to do it. I think I set a limit that we would do it for $10k which is just not going to happen. Now looking back, I’m like WHAT IS WRONG WITH ME? We could have found a month-to-month rental. Oh well. Thanks for sharing the Masters rule! Super helpful for people to know.
Nothings wrong with you! Most people wouldn’t have the guts to rent out their primary home and find someplace else to live. It would have definitely been an interesting experiment for sure though! Imagine if you had made some big bucks renting it out as a sort of vacation home. Probably could have brought in a few thousand of tax-free income!
For my bachelor party, we paid $750 a night for a cabin. If you were the type of person with a cabin (which a ton of people in Minnesota have), that could be $10,000 of tax-free income if you limited the amount of time you rented out your vacation home to 14 days.
The family that owns the mansion where the Bachelor and Bachelorette are shot gets this type of deal twice a year. Shooting in LA is usually only 2 weeks before the production is on the road and doing destination travel. They must make a killing. If it was under 14 days of rental in total that is a ton of tax free money. I’d happily give up my primary home for location shoots several times a year. So many creative ways to get tax free money.
We still haven’t tried hosting, but you keep making compelling arguments. I’m going to have to keep this in mind. An interesting loophole, and crazy story behind it!
Really crazy what you can do when you’ve got the money to lobby for tax breaks!
THIS is my sort of blog post! I wasn’t aware of the Masters Rule, and this is the kind of stuff people need to learn about if they really want to hack their finances. Tax hacks are extremely underrated and I’ve seen a big boost in my finances the past couple years as we looked to optimize our taxes.
Thank David! Most people don’t know about this tax exemption simply because there hasn’t really been an opportunity for people to take advantage of it before. But with Airbnb, anyone can do this. I’m positive that anyone with a house and a guest room could handle hosting a guest for 14 random days per year.
Tax-free income is awesome! I can’t do Airbnb since I live in a co-op…highly doubt the rules allow me to do it…plus I have no room anyway. Do you rent out a room or is it a separate unit in your house? I would feel a little weird having a stranger walking around. I would love to do Airbnb here in NYC but it’s too expensive to buy property here. Thought about buying property out-of-state and paying a property manager but will have to do a lot more research.
Obviously, only do it if your rules or state laws allow you to. I don’t advocate anyone violating their lease or condo rules.
I rent out a guest room in my house. Without a doubt, 99% of people I talk to don’t want to do Airbnb because they think it’ll be weird having a stranger walking around their house. That’s what I thought too when I first started but you’ll soon learn that most people are just normal cool people like you and me. If you like people and are a normal, sociable person, it’s not weird.
And when someone rents a room from you on Airbnb, they never hang out in your house. People renting out a room are usually coming into town for a specific reason (visiting friends, conferences, interviews, etc). It’s like if you rented a room on Airbnb. Would you just sit around in someone’s living room or would you be out and about all day and just come back home to sleep?
But the great thing is, with this masters tax exemption, you can at least just try Airbnb out and pay no taxes on those earnings. Not a lot of chances to just try out projects like this with no commitment.
Thanks for sharing! I had no idea about this and it is a great way to try Airbnb.
I’m not quite in the position to try rent out yet, but this is definitely a motivator.
Great post, man!
Thanks man! Really, I just think anyone can try out Airbnb, especially since it’s possible to try it out with basically no tax implications. It’s not really possible to “try out” being a traditional landlord, for example. It’s sort of a go all-in or don’t do it at all. Makes Airbnb a really low risk way to sort of be a landlord.
Dude. Such a great point, and LOVE the idea of this tax advantage pushing fence sitting would-be hosts to give it a try. Thanks for explaining it so clearly!
Thanks! I know that most people won’t give Airbnb a shot, but I always say that it’s worth trying out to at least see if it’s something you can do. If it doesn’t work out, then hey, all you lose is some time and at least you can have a good reason that it wasn’t for you. Given that you can do this all tax-free, why not try it out, right?