There are several benefits to buying residential vacation homes: the opportunity for a short getaway, passive income, and even some extra storage space. The greatest benefit, however, is that as a property owner, you may take advantage of numerous vacation rental tax deductions.
There are a variety of vacation rental property expenditures owners might deduct and apply to reduce their tax burden, including operating expenses, maintenance costs, renovation costs, and more. However, as with anything concerning the tax code, it is critical to consult a professional and follow the regulations and standards set by the IRS.
So, before getting directly into the tax deductions, it is important to touch on some items that should be known from the outset of your vacation homeowner experience.
6 Need-to-Knows When it Comes to Taxes and Your Short Term Rental Property
1. Be Clear with The IRS About the Status of Your Rental Property
In order to get the most tax deductions for your rental property, it is important to operate it as a full-time rental business. Being clear with the IRS about the status of your rental property as a business will make your life easier. There are two ways to do that:
- Your documentation demonstrates the “ordinary and necessary” related to running a rental business.
- You are abiding by the 14-day rule (read below).
2. The 14-Day Rule
Abiding by the 14-day rule demonstrates that the home you’re renting is first and primarily a rental home business, which means it’s not a residence for you. You’re considered to use a home as a residence if you use it for personal purposes during the tax year for a number of days that’s more than the greater of:
- 14 days, or
- 10% of the total days you rent it to others at a fair rental price.
If you’re using your home for “personal purposes” for more than 14 days or 10% of total rental days (whichever is greater), “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” (IRS, Topic No. 415). Put another way, your deductions as business expenses start to dwindle as limitations creep their way into tax calculations, which can eat away at your profit margins.
Being clear about the 14-day rule from the outset allows you to be intentional about how you use your property over the tax year, which can make up all the difference (both in terms of $$$ and stress levels).
3. Keep Meticulous Records
When it comes to vacation rental tax deductions, it is important to keep meticulous records and receipts in order to prove your expenses to the IRS. With the right documentation, you can maximize your deductions and keep more of your hard-earned money.
4. Minimal Rental Use
A lot of people get this confused with the 14-day rule and vice versa, but this states that if you rent your home out for less than 15 days, you don’t have to pay taxes on that income. This means you can rent your home out for up to 14 days and not have that income count toward your taxable income.
5. Not all of Your Stays in Your Rental Home are for “Personal Purposes”
Another item to be aware of is that the 14 personal days do not include stays at your home that are for the express purposes of improving or maintaining your rental property. These are not seen as “personal purposes” and should be understood as “ordinary and necessary” expenses related to running a rental business.
6. Work with a Tax Professional
Though you can operate without one, tax professionals can help you make use of any and all deductions available to vacation rental homeowners. In addition, the fees associated with bookkeeping and accounting can be written off, making it likely that they provide a nice return on your investment in them.
What vacation rental expenses can you write-off?
1. Property Tax Deductions
As a business expense, property taxes may be deducted with little restriction. Generally, vacation rental homeowners may take the full amount of property taxes as business deductions. This deduction applies to you if your property is designated as a vacation rental property officially (think the 14-day rule). The $10,000 cap on property tax deductions applies only to personal deductions, as the limitation does not apply to properties utilized as rental businesses.
2. Utilities
Utilities account for a significant portion of your monthly expenditure, which helps to keep your vacation rental running. Fortunately, these expenses may be deducted from the months you rent out your home. Water, electricity, gas, internet, cable, and trash removal are all examples of this category. These costs might represent significant savings come tax time if combined and documented correctly.
3. Deduct Repair Costs
The IRS says that you can deduct the cost of maintaining your vacation rental property. But make sure that what you are doing is actually maintenance and not a repair. The IRS counts both of these as deductions, but you have to list them separately on your Schedule E. A simple rule of thumb is that maintenance is done to prevent something from breaking, while a repair is done after something has already broken.
4. Mortgage Loan Interest
The Tax Cuts and Jobs Act lowered the amount that people can take as personal deductions for the interest on mortgages for their primary and secondary residences. However, if you have a rental property, you can deduct all of the mortgage interest as a business expense.
5. Property Management Fees
Deductions for business costs may include the fees connected with property management services, such as those billed to you by your vacation rental management company.
6. Insurance Fees
It’s critical to have the proper insurance coverage if you want to run a vacation rental property. While insurance expenses might raise your monthly running costs, they are deductible as tax deductions.
7. Advertising and Marketing Costs
Advertising cost is another one of those “ordinary and necessary” expenses a business faces, so they, too, can count as deductibles. The vacation rental industry is increasingly competitive, so it often pays to invest in some good marketing. You can deduct anything from the cost of your vacation rental listing site to business cards and local print ads.
8. Cleaning and Maintenance
Cleaning and maintenance are things that, if not done, reflect in the revenue potential a rental home can have, so cleaning services are a vacation rental tax deduction. If you live too far away to do it yourself, you can also deduct the cost of paying someone else to come in and take care of things while your guests are there.
9. HOA Dues and Fees
If you have a vacation rental home in a community with an HOA, you can deduct the dues and fees that you pay to the HOA as a business expense. This deduction can add up, especially if your HOA dues are high.
10. Depreciation
The IRS considers vacation rental homes to be “depreciable property,” which means that vacation rental homeowners can take an annual depreciation deduction for their property. This tax deduction is a little more complicated because it’s based on how long you own the property and what improvements have been made to it over time, but a tax professional can help determine the amount.
10. Legal Fees and Professional Fees
There will be times when you need professional services, such as those of an attorney or accountant. Many of these services count as a deduction, so long as they are directly related to your vacation rental business.
11. Transportation
Need to go visit the property to check on repairs or a project? When you travel to visit your property for business related to your rental, you may be able to deduct expenses such as airfare, lodging, mileage, meals, and other travel costs as an expense.
A Quick Word On Passive Loss Rules
An area to take note of is passive loss rules – a set of IRS rules outlining that passive losses can only offset passive income. If or when these rules apply, losses generated by vacation rentals are only deductible against other sources of passive income or against any gain realized on the sale of the home or other passive income property. This means that you may not be able to provide the deductions/losses each year and instead, such deductions/losses may end-up getting forwarded to future years.
Conclusion
As a vacation rental property owner, it’s important to be aware of the many deductions you may be eligible for during tax time and which ones may apply to your particular situation. By taking advantage of these vacation rental tax deductions, you can save yourself a significant amount of money. Be sure to consult with a tax professional to make sure you are being placed in the best position for your situation.
Are you interested in listing your home as a vacation rental? Learn more about our vacation rental property management program, available to those in Washington, Oregon, and California.
