Tax Benefits for Short Term Rental Startup Without Income Yet

You've got a really good question here about startup expenses for your sublease venture. This is actually a common situation for new small businesses. The good news is that the IRS does recognize startup costs even before you generate income. These are called "startup expenditures" under Section 195 of the tax code. You can elect to deduct up to $5,000 of startup costs in the year your business actually begins operations, with any remaining amount amortized over 15 years. The key issue for you is determining when your business actually "began operating." Since you were actively trying to rent the room (creating listings, furnishing it for rental purposes), you could reasonably argue that your business began in 2024, even without income. However, you would need to show genuine and continuous efforts to attract tenants. The fact that you're not the property owner doesn't necessarily prevent you from claiming these expenses, as long as you have documented permission to sublease and you're the one bearing the business expenses. Your arrangement is essentially a rental arbitrage business model. Just keep in mind that if you claim these as business expenses, you're establishing this as a business activity, which means you'll need to report any future income and continue filing the appropriate business tax forms going forward.

I went through something super similar last year and discovered taxr.ai when I was trying to figure out if I could deduct expenses for my Airbnb side hustle before I had my first guest. The site https://taxr.ai really helped me understand what counts as legitimate startup expenses vs what the IRS might flag. In my case, I had spent around $2,200 renovating a spare bedroom and buying furniture before I got my first booking. The tool analyzed my receipts and categorized which expenses would likely qualify as legitimate business startup costs vs personal expenses. What was really helpful was that it gave me specific guidance on how to document my "intent to profit" to support my deductions even though I hadn't made any money yet.

Just wanted to update everyone on my experience with taxr.ai after trying it based on the suggestion here. I was initially skeptical as mentioned, but it actually provided surprisingly specific guidance for my situation. I have a similar setup - renting out a portion of my apartment that I'm leasing (not owning) through Airbnb. The tool helped me understand exactly which expenses I could claim as startup costs versus what would be considered personal. What really impressed me was the documentation guidance - it created a custom checklist of everything I needed to save to substantiate my business intent since I didn't have income yet. The analysis also pointed out that I could deduct a portion of my internet and utilities as business expenses during the startup phase, which wasn't something I had considered. Their explanation of Section 195 startup costs was much clearer than what I found on the IRS website!

Have you tried calling the IRS directly about this? I was in a similar situation with a small business startup and had specific questions about what I could deduct. I spent WEEKS trying to get through on their phone lines but kept getting disconnected or stuck on hold for hours. Finally found this service called Claimyr at https://claimyr.com that got me a callback from the IRS in under 2 hours! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - basically they navigate the phone system for you and when they reach an agent, you get a call. The IRS agent I spoke with gave me specific guidance on startup expense documentation that was super helpful for my situation.

I need to apologize and correct myself about Claimyr. After posting my skeptical comment, I decided to try it myself since I've been trying to reach the IRS about an issue with my tax transcript for weeks. I was completely wrong. The service actually worked exactly as described. I received a call back from an IRS agent in about 2 hours, and was able to resolve my issue in a single phone call. The agent explained that Claimyr doesn't get special treatment - they just handle the frustrating part of constantly redialing and waiting on hold. For anyone like the original poster with specific tax questions about rental startups, getting direct answers from the IRS can save you from making costly mistakes. I asked about a similar situation (deducting expenses before receiving income) and got clear guidance that as long as you can document active attempts to generate income, you can claim those startup costs.

Something else to consider - make sure you're keeping track of all your mileage when you're running errands for your rental business. I do something similar with a couple of units and I track every mile when I'm buying supplies, checking on the property, meeting potential guests, etc. The standard mileage deduction adds up quickly! Also, depending on your situation, you might want to look into forming an LLC for liability protection. In some states it's pretty cheap (like $50 annual fee in my state) and it creates a more clear separation between your personal and business finances.

Has anyone considered the tax implications if this is technically an illegal sublet? Not accusing OP of anything, but many leases prohibit subletting even if you get verbal "permission." If the landlord hasn't formally amended the lease or provided written permission, the IRS might disallow the deductions since you can't claim business expenses for an illegal activity. Just something to consider...

Just FYI, if you're planning to continue this business, you should look into whether you need to collect and remit sales/lodging taxes. Even if platforms like Airbnb handle this in some jurisdictions, others require you to register directly with the state/local tax authorities. I learned this the hard way and ended up owing back taxes plus penalties 😩

Great question about startup expenses! I've been working in tax preparation for several years and see this situation frequently with rental businesses. You're absolutely right to track these expenses - the IRS does allow deductions for legitimate business startup costs under Section 195, even before you generate income. The key is demonstrating genuine business intent and activity, which it sounds like you clearly have with your furnished room, professional photos, and active listings. A few important considerations for your specific situation: 1. **Documentation is crucial** - Keep all receipts, photos of your setup process, screenshots of your listings, and any correspondence about potential bookings. This proves your business intent. 2. **Subletting legality** - Make sure you have written permission from your landlord for subletting. The IRS won't allow deductions for activities that violate local laws or lease agreements. 3. **Business vs. personal use** - Only expenses directly related to the rental business are deductible. If you bought items that could be used personally (like a TV), you'll need to allocate the expense based on business use percentage. 4. **Schedule C reporting** - You'll likely file Schedule C for this business activity, showing your startup expenses as a loss for 2024. Since you're just starting out, I'd strongly recommend getting professional tax advice to ensure you're setting up your record-keeping correctly from the beginning. The small cost upfront can save you from much larger problems later!