Maximize your short-term rental tax savings with the new federal deductions and the 14-day rule.
July 18, 2019 5 min read
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With summer vacations at a peak, it’s a great time to review the top nine tax deductions you can ake for your short-term rental properties through Airbnb, VRBO, HomeToGo and more.
Fortunately, the Tax Cuts and Jobs Act of 2017 includes many new deductions and considers vacations rentals as businesses. So, if you are renting a home or room as part of a business entity, this is information you can use.
Related: 6 Reasons Why Vacation Home Rental is the Next Big Thing in Indian Travel Industry
From a big-picture perspective, one of the most important rules to understand is the 14-Day Rule for rental property owners. Under this rule, you don't pay income tax on your short-term rental income. But, to take advantage of this rule, there are two requirements: 1) You rent out the property for 14 days or less during the year; and, 2) You use the vacation house yourself for the greater of 14 days or 10 percent of the total days you rent it to others.
If your use exceeds 14 days and/or you don’t use the vacation property at all, you must pay taxes. If your rental(s) is/are subject to income tax, here are nine important tax deductions to keep in mind for significant savings:
1. A new bonus depreciation deduction: Instead of letting property owners to deduct only 50 percent of your furniture and equipment, the new tax law now allows owners to deduct 100 percent of expenses for personal property and land improvements used for business. This change applies to new properties placed into service from September 27, 2017 to December 31, 2022.
2. A new pass-through deduction: Landlords who own a property as a business entity (Sole Proprietorship, S-Corp, C-Corp) may be able to deduct 20 percent of their rental property net income as a result of the new Tax Cuts and Jobs Act of 2017. To determine if you are eligible for this major deduction, consult a tax advisor.
3. New Section 179 deductions for improvements: The new Section 179 Deduction now allows vacation property owners to legally deduct capital expenditures, such as roofs, HVAC units, security systems and fire alarms, as long as the vacation rental is used by customers on average for seven days or less.
Related: 10 Hosting Options Beyond Airbnb
4. The home office deduction: If you manage your rental properties from a home office, you may be able to deduct expenses related to that home office. Deductions for equipment, utilities and supplies may be deducted as a percentage of your home expenses.
5. Rental property insurance deduction: As a rental property owner, you can deduct your insurance costs. These expenses may include mortgage and fire insurance fees for the year in which they are paid.
6. Guest service fee deductions: Most short-term rental companies such as VRBO charge a guest service fee that is also deductible. In the case of Airbnb, the fee is usually 0 percent to 20 percent of the cost. You can write off this fee on your tax returns for vacation rentals. You and the IRS will receive a 1099 Form from the rental company that will supply for your records the total fees collected.
7. Real estate tax deductions: Real estate taxes are not allowed on your personal return once our overall tax deductions exceed $10,000. This limit does not apply for real estate taxes related to vacation rentals with respect to the percentage of the days rented, as this converts the taxes from personal taxes to business taxes.
8. Travel expense deductions: You may also continue to deduct your expenses when traveling to your rental property for maintenance and repairs. These travel deductions may include airfare, accommodations, meals, miles and other expenses, as long as they are reasonable.
9. Room rental deductions: If you rent out a room (versus the entire house) for more than 14 days, you will pay tax on the rental income. In addition, you may deduct 100 percent of expenses such as property insurance, mortgage interest and property taxes based on a percentage of your business versus personal use. If your room rentals total less than 14 days total for the year, you do not need to pay tax on this income, as the 14-Day Rule applies.
One of the most important things that you need to do as a short-term rental landlord is to keep detailed records of everything. Track both the rental days and the days that you used the residence. You will need this information to separate personal versus business use, for tax purposes for deductions such as mortgage interest.
Related: Take Advantage of These 16 Commonly Missed Tax Deductions
If you own rental property, I highly recommend working with a tax advisor. There are many new rules and deductions with the Tax Cuts and Jobs Act of 2017 to consider, and it’s important for an expert to look at your overall financials. Invest the time to learn these new rules, and you will see significant rental property savings over the long term.