Short-term rental marketplaces such as Airbnb, HomeAway, and Vrbo have made it easy for homeowners and property managers to market their rental property. Experienced operators know that in order to succeed, you need to treat your short-term rental like a business. Luckily, the IRS agrees, so if you already operate like a business, you also get businesslike deductions when income tax time comes.
Short-term rental operators are allowed to deduct “ordinary and necessary” expenses related to their business. There are plenty of deduction opportunities for your vacation rental business, but they might not all be obvious, so it pays to do a little research to make sure you aren’t missing out.
Homeowners and property managers should especially pay attention to Tax Cuts and Jobs Act deductions, which became available starting with the 2018 tax year.
NOTE Keep in mind that these deductions relate to federal income tax. It’s important to understand the difference between income tax, which you pay to the government based on your income, vs. lodging taxes, which is a tax your guests pay on the cost of renting short-term accommodations from you.
You as the host don’t actually pay lodging taxes, but you’re responsible for collecting the tax and passing it on to the appropriate state and local tax authorities. There are no deductions you can claim for lodging taxes. MyLodgeTax can help automate and simplify lodging tax compliance for short-term rental owners.
1. Qualified Business Income
After all your deductions and depreciation, you get another deduction: Pass-through business tax deduction. Under the Tax Cuts and Jobs Act that took full effect in 2018, residential landlords who own their rental property through "pass-through" entities — including sole proprietorships (meaning they own the property individually), limited liability companies, or partnerships — may be eligible to deduct an amount equal to 20% of their net rental income. This is a personal deduction that can be taken even if you don't itemize. However, it's not an "above the line" deduction that reduces adjusted gross income. Renters —> LLC —> You
There are thresholds but they are relatively high, $350,00 for merry taxpayers & 157,000 for all others, if you are under any of these thresholds you can deduct an amount equal to 20% of their net rental income (so be sure to work with a licensed & well-established CPA with real estate investment experience to discuss this if it applies or want to learn more).
2. Depreciation
This is probably the best part, tax wise of owning a short-term rental property; How you write off business expenses for example consumable supplies for your rental business vs assets such as large machinery/cars/etc.
Qualified Business Income
(Purchase Price - Land Value) ➗ 27.5 years = Depreciation Tax Deduction
(39 years for commercial properties)
Bonus Depreciation: Since 2018, short-term rental owners have been allowed to deduct the full cost of property such as appliances and furniture all in one year using 100% bonus depreciation. The deduction applies to new or used property placed into service from September 27, 2017, through December 31, 2022.
3. Mortgage Insurance
The Tax Cuts and Jobs Act lowered the amounts that can be taken as personal deductions for mortgage interest on primary and secondary residences. However, these limits don’t apply to rental businesses, so you can deduct all mortgage interest on rental properties as a business expense.
4. Travel & Transportation
It’s so important that you keep track of the miles you incur driving back and forth from your properties, so you can write off that mileage. I like to use the app DriversNote, at the end of the year I download the mileage and send it to my CPA. (There is a whole other tax break depending on if your business needs its own vehicle, which is also a write off)
Let’s say you want to travel for business related to your vacation rental, well you can deduct those expenses as well, such as airfare, accommodations, mileage, meals, and other travel expenses. This could include activities such as:
- Traveling to your rental property to do repairs or maintenance
- Learning related to your rental, such as classes, seminars, conventions, or trade shows
- Meeting with business associates who work with or for you in your rental business
- You can also deduct mileage for travel to a store to pick up supplies or equipment.
- Keep in mind that any travel related to improvements, as opposed to those for repairs, may need to be added to the improvement’s tax basis and depreciated.
5. Upgrades
When you remodel or upgrade an investment property everything you spend is a write off, after you finish the upgrade, it ends up being cheaper and improves the value of your property!
The deduction for major improvements includes Section 179 of the tax code allows owners to write off the costs — up to $1,050,000 for 2021 — of certain personal property used in a business. Since 2018, vacation rental operators have been able to write off the costs of HVACs,fire systems, security systems, and roofs. Section 179 applies only to property used for rental more than 50% of the time.
6. Maintenance
You can write off all maintenance! Owning a short-term rental means your property gets used by all kinds of visitors requiring maintenance every here and there. Thankfully this is another great write off which includes maintaining or even improving the property and its value. Not only does maintaining your property ensure guest/tenant happiness + 5-star reviews but it's also keeping your property value up.
7. Supplies
Any supplies you purchase for maintenance or items to ensure guest happiness is also tax deductible which means items for staging, plants, art, etc. If you manage your rental business from a home office, you may be able to deduct expenses related to the office, including equipment, supplies, and a percentage of many of the costs of running your home.
8. Monthly Expenses
Mortgage Insurance, HOA, Utilities & any other bills/ monthly expenses (application, market & service fees) for the rental property categorize as a legal tax deduction.
Airbnb charges a “host service fee” of 3% of the cost of each reservation, while Vrbo/HomeAway charge annual subscription fees or pay-per booking fees. These fees are completely deductible, so make sure you keep track of them.
Insurance You can deduct the cost of any insurance that covers your rental property. You can also claim a deduction for private mortgage insurance (PMI) premiums on rental property for the year they were paid. However, if you prepay PMI premiums for multiple years in advance, you can only deduct the part of the PMI payment that applies to that year.
If you use credit cards or personal loans to pay for vacation rental business expenses, you can deduct the cost of interest payments on those accounts. As of 2018, personal deductions for interest on home equity loans were eliminated altogether, but you can still deduct this type of interest as a business expense for a rental property.
9. Property Taxes
Personal deductions for property taxes are capped at $10,000. However, like the mortgage interest deduction, the limit doesn’t apply to properties operated as rental businesses. Owners of rental properties can take the full amount of property taxes as business deductions.
While many tax deductions for your rental business seem small, they can really add up. Make sure to categorize your expenses as you go along so tax season isn’t a headache. Keeping detailed records of any expenses related to your rental makes things much easier when it comes time to file your taxes — as well as in case the IRS has questions down the line. Both knowing what you can deduct and keeping good track of those expenses can help you take maximum advantage of tax savings on your rental property.
If you’d like to know more about short term rentals, feel free to reach out I’m always happy to help or chat.
