by Ariel Penn
Everyone loves passive-income, especially when it comes with added benefits. These include lower taxes and the unique experience of hosting one’s favorite tv show or film actor.
Is filming location rental income really tax-free? The first 14 days of film location rental income is free from U.S. federal IRS taxes (personal residences only). Most U.S. states also exempt the first 14 days from state income taxes. You must occupy the residence at least 14 days a year to qualify. Confirm your status with your tax consultant prior to your first rental day.
Due to these tax benefits, can filming rentals generate full-time, passive income?
During my career as a film commissioner, I met many location owners who made full-time livings by hosting filming 14 days or less each year. And they were able to enjoy the full benefits of that income since nothing needed to be paid to the U.S. federal government or their state.
The math on the full-time income part is easy. For instance, if you charge $5000 a day for filming and host 14 days in a year, that’s $70,000 in tax free income fully available to use and enjoy. Keep in mind, a preparation (prep) or set removal (strike) day are charged at half the rental rate of the actual filming day when the full cast and crew are on the property.
How does this tax-free film location rental exemption work on a practical level?
Some filming hosts are determined to not pay taxes so they restrict their filming activities to 14 days or under. Many don’t want the hassle of tracking this additional source of income on their tax returns (an IRS Schedule E).
Others are discouraged from hosting smaller productions, still photographers or students who have much less money to pay for rentals. This is especially true for properties that are in high demand and host filming regularly. Homeowners may make an exception for student or non-profit shoot at a lesser rental fee if they feel confident this won’t cause them to exceed their 14 days of filming.
What if I host filming beyond the 14 day tax-free restriction?
Beyond day 14, the income would be subject to taxes minus any itemization of standard business expenses. However, with Tax Cuts and Jobs Act of 2017, there are additional deductions available. If you host filming as a sole proprietor, partnership, trust, estate or S corporation you may qualify for a Qualified Business Income deduction, or QBI. Under the QBI you can deduct 20% of income from a qualified business from your taxable income.
If I do host more than 14 days of filming and pay taxes, what can I itemize?
You can itemize all of the standard business deductions including mortgage interest, insurance, cleaning and maintenance, property taxes, advertising (anything to promote our property – web services, printing etc), professional memberships, legal fees among many others.
What can I do to ensure the film companies don’t withhold taxes from my rental fee?
You could lose access to part of your rental fee if you don’t receive or provide the proper paperwork to the film company. The production could withhold as much as 28% of your rental income if you don’t provide your W-9 form. In most cases, your effective tax rate will be lower than 28%.
There’s no reason to let the tax representatives keep your overpayment all year, so file your W-9. Once you do, the film company can reduce the withholding percentage, giving you immediate access to the maximum amount of rental income.
IRS Language on Filming Location Rentals (Updated by IRS 1/28/19):
Topic Number 415 – Renting Residential and Vacation Property
If you receive rental income for the use of a dwelling unit, such as a house or an apartment, you may deduct certain expenses. These expenses, which may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation, will reduce the amount of rental income that’s subject to tax. You’ll generally report such income and expenses on Form 1040.pdf, U.S. Individual Income Tax Return, Form 1040, Schedule 1.pdf, Additional Income and Adjustments to Income, and on Form 1040, Schedule E.pdf, Supplemental Income and Loss. If you’re renting to make a profit and don’t use the dwelling unit as a residence, then your deductible rental expenses may be more than your gross rental income. Your rental losses, however, generally will be limited by the “at-risk” rules and/or the passive activity loss rules. For information on these limits, refer to Publication 925, Passive Activities and At-Risk Rules.
Rental Property / Personal Use
If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. You’re considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of:
- 14 days, or
- 10% of the total days you rent it to others at a fair rental price.
It’s possible that you’ll use more than one dwelling unit as a residence during the year. For example, if you live in your main home for 11 months, your home is a dwelling unit used as a residence. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a residence unless you rent your vacation home to others at a fair rental value for 300 or more days during the year in this example.
A day of personal use of a dwelling unit is any day that it’s used by:
- You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home and the other owner pays a fair rental price under a shared equity financing agreement
- A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price
- Anyone under an agreement that lets you use some other dwelling unit
- Anyone at less than fair rental price
Minimal Rental Use
There’s a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses.
Dividing Expenses between Rental and Personal Use
If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won’t be able to deduct your rental expense in excess of the gross rental income limitation (your gross rental income less the rental portion of mortgage interest, real estate taxes, and casualty losses, and rental expenses like realtors’ fees and advertising costs). However, you may be able to carry forward some of these rental expenses to the next year, subject to the gross rental income limitation for that year. If you itemize your deductions on Form 1040, Schedule A.pdf, Itemized Deductions, you may still be able to deduct your personal portion of mortgage interest, property taxes, and casualty losses from Federally declared disasters on that schedule.
Business Use of Home
Another special rule applies if you rent part of your home to your employer and provide services for your employer in that rented space. In this case, report the rental income. You can deduct mortgage interest, real estate taxes, and personal casualty losses from Federally declared disasters for the rented part, subject to any limitations, but don’t deduct any business expenses. For information on these limits, refer to Publication 587, Business Use of Your Home (Including Use by Daycare Providers).
Net Investment Income Tax
If you have a rental income, you may be subject to the Net Investment Income Tax (NIIT). For more information, refer to Topic No. 559.
For more information on offering residential property for rent, refer to Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
For more information on residential rental property income and expenses, refer to Topic No. 414 and Is My Residential Rental Income Taxable and/or Are My Expenses Deductible?
Published: March 14, 2019