10 easily overlooked tax deductions vacation rental hosts can claim
- Rental Tips & Advice
- March 12, 2018 | Jennifer Sokolowsky
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. And 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 on the deductions you could claim.
Homeowners and property managers should especially pay attention to new Tax Cuts and Jobs Act deductions, most of which are available starting with the 2018 tax year.
Income taxes vs. lodging taxes
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.
The 14-day rule
To maximize your tax deductions, your home must be classified as a full-time rental business. That means it’s used by you for your personal stays for less than 14 days or fewer or 10 percent or less of total annual rental days, whichever is greater. Keep in mind that days primarily spent repairing or maintaining the property don’t count toward personal use days.
If you use your rental home for personal use for more than 14 days a year, you’re only allowed to make deductions in proportion to the amount of time the property is being rented by guests. If you only rent out part of the property, you’ll only be able to deduct expenses in proportion to how much of the property you rent out.
A benefit of using your property as a full-time rental business is that you may be able to deduct up to $25,000 in losses each year, depending on your income. If your property is only a part-time rental business, you won’t be able to deduct a loss when you spend more on the property than you earn in rental income.
On the other hand, if you offer your property for short-term rental for only 14 days or less during the year, and you use the property yourself 14 days or more — or at least 10 percent of the total days you rent it out — then you do not need to pay income tax on that rental income.
10 income tax deductions you may be missing
1. New pass-through business tax deduction
Under the new Tax Cuts and Jobs Act that went into effect January 1, 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 percent of their net rental income beginning with the 2018 tax year. 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.
2. New deduction for major improvements
Section 179 of the tax code allows owners to write off the costs of certain personal property used in a business. Changes to this section now allow some vacation rental operators to write off the cost of fire systems, security systems, roofs, and HVACs. The amount that can be deducted for personal property under Section 179 was raised to $1 million starting in 2018; previously it was $500,000. Section 179 is applicable only to property used for rental more than 50 percent of the time.
3. New bonus depreciation deduction
Previously, business owners could only deduct 50 percent of the cost of personal property used for the business each year. The new tax law changes that to 100 percent, meaning you can deduct the full cost of property such as appliances and furniture all in one year. The changes apply to new or used property placed into service from September 27, 2017, through December 31, 2022.
4. Mortgage interest
The new tax law lowered the amounts that can be taken as personal deductions for mortgage interest on primary and secondary residences. Previously, you could take a deduction on interest on up to $1 million in newly acquired debt; the new law changes that amount to $750,000. However, these limits do not apply to rental businesses, so you can deduct all mortgage interest on rental properties as a business expense.
5. Credit card and loan interest
If you use credit cards or personal loans to pay for 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.
6. Property taxes
The Tax Cuts and Jobs Act also lowered the amount that can be taken as a personal deduction for property taxes to $10,000; previously there was no limit. However, similar to the mortgage interest deduction, the limit does not apply to properties operated as rental businesses. So owners of rental properties can take the full amount of property taxes as business deductions.
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.
8. Marketplace fees
Airbnb charges a “host service fee” of 3 percent of the cost of each reservation while HomeAway charges $499 for an annual subscription. These fees are completely deductible, so make sure you keep track of them.
9. Travel and transportation expenses
When you travel overnight for business related to your vacation rental, you can deduct expenses 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 you in your rental business
You can also deduct mileage for travel closer to home in order to visit your property or other related travel, such as going 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.
10. Home office
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.
Getting the most out of your rental
While many tax deductions for your rental business seem small, they can really add up. Make sure to record your expenses as you go along. 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.