Being a property manager or owner provides several advantages that are sometimes overlooked, such as tax benefits and deductions for holiday rental income. While operating a vacation rental company entails a plethora of fees and regulations, you can be confident that there are strategies to reduce your taxable revenue.
Even if you’ve had a prosperous fiscal year, paying a check to the federal treasury may be a painful exercise in handing away money. While there is no way to avoid paying Uncle Sam, properly categorized vacation rental tax deductions may significantly reduce your payment and put some of that money back in your pocket.
Each nation has its unique set of rental property tax rules. Deductions will always differ by area, so be sure to thoroughly research your country’s and state’s tax codes well in advance of declaring your yearly rental income. There are even vacation rental software out there that do the accounting for you (more about that later).
Are you ready to learn which taxes you may deduct as a vacation rental owner in the United States?
Expenses for Vacation Rental Properties: Minimum Requirements
Before you begin tracking federal deductions in the United States, ensure that you fulfill the Internal Revenue Service’s fundamental rental property standards. To begin, you must rent your home for a minimum of 14 days every year. This is a test of the 14-day rule for holiday rentals that will determine whether or not your vacation rental may be classified as a company. If you rent for fewer than 14 days, the IRS deems it a second residence, therefore some tax deductions do not apply.
Second, you’ll need to keep note of any personal time spent at your holiday property. If you exceed 14 days or 10% of the entire time your property is utilized, you may deduct just a part of certain property expenditures. According to the IRS, vacation houses are classified as either a business or an investment, based on the ratio of personal to rental days. Bear in mind that if your property is used for personal purposes, it enters the “investment” category, rendering some deductions null and worthless.
Personal use is defined as the following:
• You or another person with an interest in the property
• A member of your family (or another person with an interest in the property) unless they use the property as their primary home and pay the reasonable rental price
• Anyone who allows you to use another property in exchange for a fee
• Anyone who charges less than the market rental rate
If you seldom stay at your rental home, you may often deduct the whole sum. Vacation rental homes qualify for more favorable and often larger deductions than investment properties. We always suggest visiting a competent tax counsel to ensure you are fully informed.
How much may I deduct from my vacation rental company expenses?
If this is your first time submitting vacation rental taxes, you may feel a bit overwhelmed. Examining the many tax rules, exemptions, and exclusions, as well as the legalese that goes along with them, may be frightening, to say the least. Fortunately, you do not need to be a tax expert to file, but you should educate yourself on which costs are deductible to maximize your refund.
The following are the top ten vacation rental charges that you should consider deducting when preparing your tax return. We prepared a video in 2019 to emphasise these costs, but we’ve since added a few more!
1. Maintenance and control of transportation costs
Additionally, you may be eligible to deduct local transportation costs associated with collecting rental revenue, maintaining, or managing your vacation rental property. This is only possible if your rental property serves as your primary place of business. Publication 587, Business Use of Your Home, has further information.
While beautiful beach mansions and breathtaking mountain getaways are in high demand as rental properties, the expense of insuring them against hurricanes, mudslides, and other natural catastrophes may be substantial. Add some liability insurance to safeguard your valuables in the event of an accident, and it’s easy to see why your insurance agent sends you a Christmas card!
Save the card if you choose, but keep the holiday rental insurance bill as confirmation of a legal vacation rental tax deduction.
3. Maintenance, repairs, and cleaning
Even the most fortunate property owners should anticipate some repair and maintenance expenses. Therefore, whether you want a new roof or need to repair a leaking sink, you should budget for expert service fees and supply costs. Keep in mind that cleaning services for rental properties are also considered a deductible cost.
4. Utilities and government taxes
The monthly cost of supplying power, internet, water, and other vital utilities for your rental property may rapidly reach several hundred dollars. When you include state and local taxes, these possible deductions might total thousands of dollars each year.
One of the most often deducted costs is property depreciation. For the majority of organizations, this is referred to as a “paper loss,” and in real estate, it refers to a loss that is not necessarily physical or monetary. It is a capital cost that you may deduct after your vacation rental is prepared and ready to rent to visitors. Chapter 2 of the IRS Residential Property (including vacation houses) handbook contains more information.
6. Fees for accounting
While you may have previously done your tax returns using just a pencil and a calculator, a qualified accountant may save you more than simply time. With a total of ten million words in the US Tax Code in 2015, certain deductions can sneak through the cracks. Save yourself time and money by having your accountant handle it – after all, any tax expert would understand that the accounting fee you pay is also a qualified tax deduction.
7. Towels, bedding, and other materials
Although it may seem unusual, you may deduct the cost of towels, linens, and other furnishings or luxuries required for a rental property company. Therefore, save all of your Bed Bath and Beyond receipts for later use!
8. Vacant Rental property
Owners of regular rental property may often deduct expenditures and expenses associated with managing and conserving the property when it is vacant. For holiday rental owners, it may be worthwhile to investigate if this expenditure is also deductible. Particularly if your rental has experienced a setback that has impacted bookings (e.g. natural disasters or house fires).
9. Legal Costs
You may deduct legal and professional expenditures (such as tax return preparation fees) as well as any price incurred to address an underpayment of taxes on your holiday rental. This does not include federal taxes and penalties, though.
Once you become aware of some of the most significant available deductions, it’s simple to see why keeping track of all of your costs may help you save significantly. Your record-keeping system does not have to be elaborate, but it must be accurate and comprehensive. There are even some free tools available to assist you!
10. Marketing and public relations
Regardless of how you promote your rental property, all marketing expenses are completely tax-deductible.
How to deduct vacation rental property taxes
If your vacation rental property is located in the United States of America or if you live in the United States, you are undoubtedly well aware of how complicated the tax regulations may be. The IRS will refund your qualified earned income, but only after you do the math. In most circumstances, you’ll use either the Schedule C or Schedule E form to deduct your taxes. The schedule E form is best defined as the owner of a secondary pastime. You do not earn the bulk of your money from this venture, and you devote less time to the property.
On the other hand, the schedule C form is intended for full-time vacation homeowners who rely on their company for their major source of income. Additionally, they work “substantially” on their vacation rental company.
While the majority choose the C or E filing type because it makes the most tax sense for vacation rental owners, sometimes owners are misled into believing that an S company is the correct option to file. For a variety of reasons, it is highly recommended against incorporating your firm as an S corporation. Tax-free trades are exceedingly intricate, making it almost hard to transfer ownership from one generation to the next. On that note, the demise of the vacation rental owner complicates deductions and filing in comparison to another sort of organization, such as a C or E file. Finally, if you continue to owe money on a loan for your vacation rental company, you forfeit the tax benefits associated with other kinds of filings.
After determining the appropriate tax form for your firm, you’ll want to classify your costs. Depending on whether you file as an investment property or a company, you will categorize your spending as “work-related expenses” or “itemized deductions,” which has an even wider range of write-offs.
When Can Vacation Rental Expenses Be Deducted?
While most people are aware that tax season starts in late January and concludes in mid-April, few are aware that there are two “filing seasons.” One alternative is to file during tax season, while another is to file on an as-needed basis.
The first (and most often used) technique is the accrual method, which requires you to record all costs in the year in which they are incurred, regardless of when they happened. The majority of vacation rental owners choose this strategy since it allows them time to organize their spending and deductions.
If you are a cash-basis taxpayer, you declare income as it is earned, rather than waiting until the end of the tax season to report it all at once. These deductions are done immediately upon incurring the charge, rather than later. If you have a stable, well-scheduled vacation rental with fewer bookings, this option may be preferable owing to its immediacy.
While it may seem laborious, the time spent calculating and adding up your deductions might result in a tax refund of around 20% — a significant amount for small company owners! Simply keep in mind that the IRS is diligent, and they will need complete documentation and specific records if you wish to see any of that money returned.
Fortunately, the majority of costs may be invoiced online or delivered directly to your email. All receipts and expenses can then be tracked and saved in a vacation rental software. Most of them have internal accounting tools, ensuring that you don’t experience a tax meltdown in April.