Taking Advantage of Common Tax Deductions For Short Term Rentals

If you’re a short-term rental property manager looking for Airbnb tax deductions and the like, then look no further. Below, we’ll discuss a few common short term rental property tax deductions, how to qualify for them, how to report them, and anything else you might need to know. Whether you're a seasoned vacation rental business owner or just getting started with renting out your property, you'll learn how to capitalize on those key tax savings and tax benefits from your business expenses this year.

How to Classify as a Short-Term Rental

Before we dive into some common tax deductions for you to utilize, it’s important that you understand what distinguishes a short-term rental from a long-term or even mid-term rental property.

Generally, short-term rentals are thought of as properties rented out for around seven days (so think of vacation rentals, Airbnbs, Vrbos, and that realm), but the rental property community tends to disagree on exactly how to classify them. Some say that anything longer than a week is a mid-term rental, but what matters most is what your state and local laws dictate, so be sure to research the laws and restrictions that apply to you. If you’re renting a property out for months or years at a time, then you’re likely not a short-term rental, but there are still a lot of landlord tax deductions that you can qualify for.

If you only rent out a portion of your property for short terms—a room, a guest home, or something of the sort—then you can also qualify for these deductions so long as you are careful about how you divide and classify your expenses. You cannot, for example, deduct the combined utility bill of your residence and your rental property, even if they share land. So as long as you divide your utility bills accordingly (which we’ll discuss later), you may make these deductions.

Additionally, if you rent your property out for 14 or fewer days in the year, then you are not required to report these earnings to the IRS (this is commonly known as the Augusta Rule). In these cases, it may make more financial sense to not claim any short term rental deductions at all.

How do Rental Tax Deductions Work?

If you’re new to tax deductions for your rental business, then you may not have a full understanding of exactly what tax deductions are and how they work. And that’s okay! Before we dive in, here are a few things you’ll need to know:

1. Most rental income and deductions will be reported on your Schedule E tax form. This is the form used to report passive income and loss to the IRS, which includes rental businesses most of the time.
2. State and local laws vary greatly depending on where you are. It’s important to research how your local government prefers to handle certain tax nuances before you make any deductions or elections on your local or state taxes.
3. By claiming tax deductions, you decrease your taxable income. This doesn’t mean that the government is going to completely reimburse you for these expenses; rather, you will subtract these expenses from your earned income, resulting in a lower taxable income. This means you’ll pay less in taxes, which will in turn save money you would have otherwise had to pay.

How to Prepare

To qualify for any of the following short term rental deductions, you’ll first need to ensure that all of your business expenses are separate from your personal ones. It’s highly discouraged to commingle your funds, so creating a separate bank account is typically the best route to ensure that you aren’t accidentally writing off personal expenses as business ones. It’ll save you the time and effort of pouring over bank statements as you try to separate each individual expense.

With this separation of funds must also come organization. It’s vital that you keep records of every transaction—whether it be rental income, operating expenses, or another transaction relating to your business.

To claim any short term rental deductions, you’ll need to prove that these expenses are business-related. So in addition to saving your receipts and invoices, it’s also highly recommended that you keep a general ledger or something similar that will carefully document your cash flow. This will keep your rental finances organized so that when tax season comes around (or, in the event of an audit), you’ll be more than prepared to claim the following short term rental property tax deductions.

Types of Tax Deductions for Short-Term Rentals

Your vacation rental business expenses can vary widely, from repairs and cleaning to property taxes and mortgage interest. Many of these expenses are deductible, helping you lower your rental income tax due in April. Let’s dive into some common short term rental deductions and Airbnb tax deductions for you to take advantage of.

1. Maintenance and Repairs

Repair and maintenance deductions (not to be confused with depreciation deductions for improvements) are common tax deductions for landlords of all kinds. No matter the size of your rental business—and so long as you correctly classify your expenses—you can deduct costs related to maintaining the operation and quality of your property. This includes repairing pipes and replacing faulty fixtures, but it would not include new appliances or upgrading any fixtures. Those capital expenses associated with your short term rental investment will usually need to be capitalized over time.

2. Operating Expenses

In a similar vein, most operating expenses, day-to-day costs related to the operation of your business, can be immediately deducted in the year they’re incurred. Per the IRS, deductible operating expenses must be current, ordinary and necessary, directly related to rental activity, and reasonable in amount. Essentially, if there is a much more economically efficient method of achieving the same goal, it may not qualify. As far as Airbnb tax deductions and the like go, this one is relatively simple and easy to abide by.

3. Licenses and Permits

To operate as a rental business, you’ll have to jump through a few legal hoops (which differ depending on where you are). In recent years, some cities have implemented zoning restrictions and new regulations on short-term rentals, so be sure to stay on top of state and local laws wherever you operate. Fees concerning LLCs, registrations, permits, licenses, and more, can all qualify for short term rental tax deductions, so it’s important that you record even your earliest expenses if you want to deduct them.

4. Improvements

If you make any improvements to your rental property, like installing new appliances or renovating the kitchen, these are classified as capital expenses. Capital expenses must be depreciated over time, a process which looks different from the immediate deduction of typical operating expenses. You’ll essentially get your tax break over an extended period of a few years rather than all at once, which is great in the long run.

5. Utilities and Bills

As previously mentioned, you can write off any utilities and bills incurred for the operation of your rental business. If your short-term rental also has personal use days, however, you must be careful when dividing your bills. You must attribute the appropriate costs according to how many days in a month the property was used for business and personal purposes. Generally, you’ll want to divide the cost of your bills using the number of days the property was used for each purpose (if you resided in a property for half of the month and rented it out for the other half, then split it down the middle).

6. Interest and Taxes

Deducting interest and property taxes can be a bit tricky depending on how many days in the year the property was used for both personal and business purposes. If your short-term rental is strictly a property that you rent out, then you should be able to deduct your property tax and mortgage interest with little issues. If the property has multiple uses, then split the deduction according to the number of days used for each purpose, similarly to utilities and bills. Additionally, your private mortgage insurance (PMI) for your rental property may also be tax deductible.

7. Cleaning

Also qualified as an operating expense, if you hire a cleaning service to refresh your property in between stays, you can also deduct this cost. It’s a very common practice for vacation homes and other short-term rentals, but be sure you additionally report the wages you pay non-employees appropriately on your taxes. If you perform the cleaning yourself, however, you can still report the cost of the cleaning supplies as a short term rental deduction.

8. Insurance

If you’re looking out for your property, then it’s likely that you’ve got some form of landlord insurance. This is great for protecting your business in the worst-case scenarios—natural disasters, liability disputes, and more. You’ll pay an insurance premium each month for this protection (unless you pay an advanced lump sum), which can be added together and written off on your taxes at the end of the fiscal year.

9. Advertising

To fill your property, you’ll need to find tenants (or you’ll need tenants to find you). Luckily, you can write off a very wide variety of advertisement costs as short term rental property tax deductions. Whether you advertise with social media, billboards, flyers, or the internet—any costs that you incur while building your brand can be written off.

10. Software Fees

One of the many relevant Airbnb tax deductions also happens to be the costs associated with listing your property online. Listing somewhere such as Airbnb or Vrbo will result in a few platform fees, which go towards getting your name and property out there to prospective tenants. These are considered necessary expenses, so you can write them off as short term rental deductions when it’s time to file your taxes.

Similarly, rental property management software and rental property accounting software fees can be written off as tax deductions and reported as operating expenses, since they can in the smooth operation and organization of your business.

Conclusion

Given the rising popularity of vacation rental properties, understanding the short term rental property tax deductions available to you is even more important. With meticulous record-keeping and a comprehensive understanding of tax deductions, you can turn your short-term rental business into an extremely profitable source of passive income.

 

Disclaimer: Ledgre does not provide tax or legal advice. All information and materials available on this site are for general informational purposes only. Contact a tax professional for advice with respect to a specific tax matter.