Owning vacation rental properties comes with various perks. For instance, did you know you can minimize your income taxes or even eliminate them when you offer your home as a short-term rental through services like Airbnb, VRBO, and HomeAway? Tax deductions are one of the perks of owning a vacation rental. When applied correctly, rental property owners can lower their taxable income.
First, you must understand if your rental vacation home qualifies to make the most of these tax benefits. If it does, vacation homes have a broad range of applicable items that meet the deduction criteria. Let’s examine how the Internal Revenues Service (IRS) qualifies vacation rental properties and what rental property deductions are available to taxpayers for keeping more of their rental income in their pocket.
Do you qualify as a vacation rental?
Here’s the tricky part: the IRS has specific tax rules about what does and doesn’t qualify as a vacation rental property.
For the property to be considered a vacation rental, it must meet two criteria:
- It must be available for rent for more than 14 days out of the year.
- You or your family can’t use it for more than 14 days or 10% of the total number of rental days.
That means if the property is rented for 200 days out of the year, you or your family can’t use it for more than 20 days.
So, if you’re a homeowner thinking about renting out your home for a month while you go on vacation yourself, that wouldn’t work. The IRS would consider it a personal residence, not a rental property.
For investors planning to run a vacation rental business, it’s easy to meet the IRS definition of a rental business. As long as it’s rented more than 14 days out of the year, it doesn’t matter if you set it up as a long-term or short-term rental.
What if you’re a homeowner planning to buy a beachfront condo, use it a few months out of the year, and rent it when you’re back at your primary residence? Mixed-use homes (those used for personal use and vacation rental) report income on Schedule E and have specific vacation-home rental rules for tax deductions.
In a mixed-use home, the IRS enables you to deduct some of the property expenses if you use your vacation rental for personal use for more than 14 days or 10 percent of the total time it’s rented. How much you’ll deduct from the mortgage interest, real estate taxes, and expenses depends on the amount of rental income and the prorate ratio. To calculate the proration rate, divide the number of rental days by the total number of days used for personal and business purposes.
For example, if you rented your second home for 50 days during the year and it was used 150 days total, the house would be considered a rental for 33% of the time. As such, you can write off 33% of any expenses related to the property.
Let’s say you rent your personal residence for less than 14 days a year. The good news is that you won’t report it as rental income. However, the IRS also doesn’t allow you to deduct any expenses as rental expenses. This is known as the 14-day rule.
So, the IRS has pathways for tax deductions whether you’re planning to invest in a full-time vacation rental property or set up your second property as a short-term vacation rental. Now, let’s get familiar with the tax guidelines and what deductions you qualify for as a vacation rental property owner.
What are the available tax deductions?
Profit from renting a vacation home is considered taxable income. But, as we’ve learned, rental property tax deductions are available to help lower the taxable rental income and increase your income tax return. Here are ten standard vacation rental tax deductions:
1. Property taxes
You can only write off $10,000 for property taxes if it’s your personal residence. But, this limit does not apply if the property is used as a vacation rental business. Rental owners can deduct the full amount of property taxes as a business expense.
2. Repairs and maintenance
All property owners should anticipate having to pay for some repairs and maintenance. After all, vacation rental properties see a lot of wear and tear, especially if they’re frequently used as short-term rentals.
Any repairs or maintenance costs rental owners incur to keep their vacation rental property in good condition are deductible expenses from their income taxes.
So whether you have to buy a new roof or fix a leaky sink, keep the invoices for the cost of those professional services and supplies.
3. Property improvement
Does the vacation rental need significant repairs? Good news! Any costs associated with improving your rental property (e.g., remodeling, painting, new roofing, etc.) can also be deducted.
Section 179 of the tax code permits operators to write off the expenses (up to $1,050,000 for 2021) of specific personal property utilized in a business. Since 2018, those who rent out their properties have been able to write off expenses such as fire systems, security systems, roofs, and HVACs.
Note that the Section 179 deduction is only eligible for use as long as the property being rented is used more than 50% of the time for business purposes. This deduction isn’t available to you if you use the property for more than half the year for personal use.
4. Mortgage interest
If you secured financing to buy a vacation rental property, the interest payments might be deductible from your taxes as a business expense. To claim the mortgage interest deduction, you must use the home more than 15 days a year of more than 10% of the number of rented days. If the property is a second home, personal interest deductions are reported on Schedule A, while rental property mortgage interest deductions are reported on Schedule E.
What about home equity loans? With a home equity loan on your vacation home, you could get tax deductions for the interest paid on the loan. You may be able to deduct all of the interest if the amount borrowed is $100,000 or less; note that if you are married filing separately, this limit reduces to $50,000. However, tax rules prevent you from deducting the interest if the loan is used for personal purposes like to finance a vacation or new furniture in your home.
5. Guest-service fees
A percentage fee, also called a guest-service fee or host-service fee, is usually taken off the top of the rent that guests pay for companies such as Airbnb and FlipKey.
You can deduct the guest service fees from your total reported income if you rent out your primary residence for more than two weeks in the year. According to IRS regulations, these fees are qualified as related to the property’s rental use and thus can be written off entirely.
Keep an eye out for IRS Form 1099. The vacation rental companies are required to send this to you. It reflects the property’s rental earnings and includes the service fee amount charged during the year.
6. Insurance premiums
Some of the most beautiful vacation spots happen to be located in places with a higher risk of a natural disaster. From beach houses to mountain retreats, many people choose to rent properties in disaster-prone areas.
For vacation property owners, insuring vacation rentals can be pretty expensive. Luckily, under current tax laws, you can deduct vacation rental insurance as an expense on Schedule E. If you prepay your insurance premiums, you can only deduct the premium payment that applies to that tax year.
7. Cleaning and maintenance
Part of earning five stars on your rental property is providing a clean, well-maintained vacation home. Many vacation property owners hire a professional cleaning company to handle the turnover between guests, especially if running a short-term vacation rental.
Lucky for you, any cleaning or maintenance costs you incur to keep the rental property clean and presentable are deductible expenses. This includes any cleaning supplies and housekeeping fees.
Marketing is an essential part of doing business as a vacation rental. How else will your guests find your amazing property? Since it’s a critical part of your operations, the costs of advertising your rental property can be deducted from your taxes. These include photography, website, ad placement, and listing site fees.
Depreciation is a way the IRS enables commercial real estate owners to recover the cost of buying income-producing properties, which includes vacation rental homes. This deduction begins when the property is placed in service–in other words when it is ready to start renting. So, if you spend a month remodeling the property and preparing to advertise, that month does not count.
Depreciation is essential for two reasons: first, it lowers the amount of rental income that is subject to tax; second, it shelters other rental income from taxes.
Rental property depreciation can be applied as a tax deduction each year over 27.5 years.
10. Legal fees
If you hired an accountant or lawyer while managing your rental property, here is more good news! Tax rules classify their service as a business expense. Accounting, tax preparation, and legal fees qualify as tax deductions.
Make the most of your vacation rental tax deductions
These are just some of the many vacation rental tax deductions available to you as a rental property owner. Be sure to talk to your certified public accountant (CPA) or tax professional to learn more about how you can save on your vacation property taxes.
Put a record-keeping strategy in place to maximize your tax deductions. Always keep meticulous records and receipts of your rental expenses throughout the year- this will make tax time a breeze!
Because there is high demand for properties in specific locations, you can expect your rental to make money every year while also increasing in value over time. Maximizing the tax advantages lets you make the most of investing in vacation rentals by reducing your income tax burden.
Invest in vacation rentals today
Managing a vacation rental can be fun, but maximum profitability in the rental business often comes from owning several units. Instead of doing all that work yourself, you can invest in rental homes through Arrived on virtually any budget. Check out available homes to see where you could invest today.