The vacation rental marketplace is growing by leaps and bounds. Online short-term rental platforms like Airbnb, Booking.com, HomeAway, and VRBO make it easy to offer your entire home or a room as a rental. On the other hand, vacation rental management platforms such as Hostfully’s help manage your business across multiple channels. With these technologies now firmly established, it’s never been easier to make a living in the hospitality industry.
But while running a successful vacation rental company can be profitable, exciting, and rewarding, it’s still a business. And that means paying income and lodging tax.
This article will discuss everything owners need to know about paying taxes on vacation rental properties in the US. And yes, our tax advice will show you ways you can lower your taxable income too. Let’s get started.
Note: If you have Airbnb rentals outside of the US, be sure to research each country’s tax regulations governing your properties. Then, long before you decide to declare your annual rental income, be sure you have all the information in hand that you’ll need.
Vacation Rental Property Expenses: Basic Requirements
To protect yourself, ensure that you meet the Internal Revenue Service (IRS) basic requirements to deduct federal deductions on your rental property. Typically, the IRS taxes your income, but certain deductions still apply. In any case, you’ll want to be sure you follow these specific rules to be able to deduct expenses related to your rental property.
The 14 day or 10% rule
To decide if you are eligible for Airbnb tax deductions, consider how often you rent out the home. If you use your vacation rental for your personal enjoyment, you cannot write off costs like insurance, maintenance, and utilities. On the other hand, if you rent out the property, you may be eligible for some deductions.
Personal use is defined as when a vacation rental property is used by:
- You or any other person who has an interest in the property
- A member of your family (or of the person who has an interest in it), unless they use the property as their main residence and pay the fair rental price
- Anyone that lets you use another residence under an agreement
- Anyone paying less than the fair rental price
Property rented for 14 days or less each year
If you rent your property but not for more than 14 nights each year, you do not need to report this additional rental income. But this also means you also cannot deduct any rental expenses. You’ll sometimes hear this referred to as the “Masters Exception” because some homeowners near prestigious golf courses like Augusta National Golf Club could earn nearly $20,000 of unreported income for less than two weeks of rentals.
Rented for more than 15 days and used for less than 14 days
When a vacation home hits the 15-day mark, it officially becomes a rental property. It is eligible for several dedications, including fees paid to property managers, insurance premiums, maintenance expenses, mortgage interest, property taxes, utilities, and depreciation.
To determine the amount you can deduct, you’ll need to determine the number of days the home was lived in as a rental property, divided by the number of total days of use. For example, if the house was lived in for a total of 150 days, but rented out for 75 days, you can deduct 50% of the expenses (75/150) from your rental income.
If applicable, owners may also deduct as much as $25,000 in losses each year. You can also write off passive losses if you manage the property independently.
The owner uses the property for more than 14 days or 10% of the total days the home was rented
On the other hand, if you, as the owner, utilize the property for more than 14 days, or 10% of the number of days the home is rented, whichever is greater, then the IRS will consider the property a personal residence and not allow rental loss to be deducted. On the other hand, you can still deduct rental expenses, up to the level of rental income. You can also deduct property taxes and mortgage interest.
Since these days have a significant impact on the well-being of the home, it is vital to document when days are used on a personal level closely. You should also note days when you worked on maintenance or repairs on the home because these days do not count toward the 14-day mark, even when you or your family uses the house for enjoyment purposes on the same day.
How vacation rental tax property deductions work
Vacation rental property owners should always be aware of their state and federal income tax responsibilities.
The National Association of Realtors has put together a Short-Term Rental Tax Rate Chart by State. However, rental tax laws can quickly change, so it’s essential to check with your State Department of Revenue website or accountant for the most up-to-date information.
Tips on Rental Real Estate Income, Deductions, and Recordkeeping from the IRS lists the deductions you can take as an owner of rental property to help keep your federal taxable net income low.
However, keep in mind that if you don’t meet the 14-day rule, the IRS considers your property a personal residence. So, these vacation rental tax deductions (except for interest and property taxes) are limited to the amount of rental income.
Repairs, maintenance, cleaning services
It doesn’t matter how careful you, your family, and your guests are: things happen and homes need fixing. You can deduct all of these expenses from your rental income. When you have your property professionally cleaned, the cleaning fees can be deducted too.
Transportation expenses for maintenance and management
You might even be able to deduct local transportation expenses spent on collecting rental income, maintenance, or managing your vacation rental property. This can only be done if your rental is your principal place of business.
Insurance
Beautiful properties often have the most expensive property insurance bills. But thankfully, those expenses are also eligible for deductions. So be sure you save your bill as proof of valid insurance and, therefore, a valid tax deduction.
Utilities & taxes
The amount you spend each month on expenses like electricity, internet, and water can quickly run a fat bill. However, these are also potential deductions.
Marketing and advertising
Marketing is an essential part of managing your property. Related expenses, as well as any accounts you create for your small business, are totally deductible.
Accounting fees
Taxes can be complicated, but even the services of a qualified tax professional are deductible. So, save yourself the headache and get professional help to manage your taxes and do the time-consuming work for you.
Towels, sheets, supplies
There’s nothing better than a great towel at your favorite rental. And as the property owner, you’ll love that even these expenses are tax deductible. Just be sure to keep track of all of your receipts for proof.
Depreciation
That’s right! As soon as you have your property ready to go, you can begin calculating depreciation. Even though this one isn’t tangible, it is still applicable.
Vacant rental property
If your vacation rental experiences a natural disaster or something else that leads to lost time, you can deduct costs for managing and conserving the property while it isn’t occupied.
Legal fees
Any fees you spend for legal reasons, including professional expenses for tax preparation, are totally tax-deductible.
Service fees
That’s right, even service fees from the traveling and booking agencies that you use for your vacation rental are tax deductible. So be sure you keep track of even these.
Workcation
While you can’t deduct for a vacation, you can deduct a “workcation.” For example, if you need to travel to do repairs or maintenance on your rental home, you can plan a trip in advance to work on your home. Be sure that you are being truthful about these travel expenses, however, because IRS penalties can be harsh.
Software
If you manage a rental today, chances are that you have plenty of software to manage your rental. In addition, all of those software and subscription expenses are deductible.
The QBI deduction
You know that time is money, and if you have spent 250 hours or more maintaining and looking after your rental, you may be eligible for the QBI dedication, which allows for 20% back of your total earned income. It just requires a lot of tracking.
Tax tips to know about vacation rental property
As an Airbnb host, you must pay taxes on your rental income. Fortunately, there are ways to keep your taxes low and potentially eliminate them.
Keep detailed records of rental income and expenses
Treat your vacation rental property as a business by keeping meticulous records for tax purposes. Doing this will help avoid tax issues and make it much easier to prorate or separate personal and business uses and expenses. Doing this will also ensure your tax savings will be correct and optimal.
Note that if you use a property management platform (PMP) like Hostfully, the cumbersome task of tracking income by property across all booking channels is done for you.
Document your business expenses
The IRS allows you to deduct “ordinary and necessary” expenses related to your vacation rental property. Be sure to organize your receipts and records so that they’re easy to find if and when you need proof of your expenses. If you’re like us and can’t stand paperwork, numerous apps can help you streamline your business operations, including keeping track of expenses.
W-9 taxpayer identification number
Online rental property platforms must withhold 28% of your gross rental income if you don’t provide them with a W-9 form. So instead of allowing the government to keep so much of your income until the end of the year, be sure to complete and file your W-9 right away with every vacation rental company you’re making bookings on.
Pay self-employment taxes
When you own and operate a vacation rental property, and that income is significant, the IRS could treat you as being self-employed in the vacation rental business. So, you may need to pay self-employment taxes like Social Security and Medicare from your gross vacation rental income. If you’re unsure whether your vacation rental income may count as self-employment, contact a tax specialist as soon as possible.
Tax reporting by online vacation rental platforms
The IRS doesn’t require platforms like Airbnb, HomeAway, FlipKey, and VRBO to provide you with a year-end 1099 income statement unless your income and transactions exceed a certain amount. However, the IRS still expects you to report and pay taxes on the income you receive.
Short-term lodging taxes
Many states, counties, and cities require vacation rental property owners to collect lodging or occupancy tax from their guests. If you’re using an online listing platform, the company is probably already doing that for you in most tourist centers. However, some taxes may apply in less-frequented counties that Airbnb or VRBO doesn’t collect. In those cases, check your local laws and regulations online, or call.
Collecting, paying, and filing lodging rental taxes
As the popularity of short-term vacation rental property has grown, the government’s interest in collecting potential untapped lodging tax revenue. These taxes are different from the state and federal income taxes paid by owners of vacation rentals.
Lodging or occupancy taxes vary from place to place and are usually charged and collected based on a percentage of the Airbnb income paid by the guest. Online rental platforms like Airbnb and VRBO may already collect and pay these taxes for you.
But if you’re renting directly to guests, the law makes vacation rental owners responsible for getting licensed, collecting, filing, and paying taxes. Using Hostfully’s Enhanced Reporting this can be done automatically each month. Owners that don’t may face penalties, interest on unpaid tax, and even legal action.
- Rules may vary by state, county, city, and municipality, so always be sure to check your local requirements.
- Business licenses and registration may be required on a state, county, and local level.
- Collect short-term or lodging taxes from your guests based on the different tax rate percentages that each taxing authority charges.
- Filing and paying taxes is done monthly, quarterly, or annually based on the various due dates of each jurisdiction.
How to deduct your vacation rental taxes
You’ll have two types of schedule forms to choose from Schedule C or Schedule E. Schedule C is for full-time vacation homeowners running their rental as a primary source of income. On the other hand, Schedule E is for people who use their rental as a side hobby. After choosing your form, you’ll need to categorize your expenses and be sure you have everything documented.
How to deduct Hostfully expenses from your taxes
Hostfully provides you with many vital services that help manage your rental, and even the US government knows these types of services are essential. You’ll file for these deductible expenses under “Miscellaneous Expenses.” There, you’ll add all those details of the subscription.
When to deduct your vacation rental expenses
There are two times when you can file your taxes. You can either file during tax season, which runs from late January to mid-April, or file as you go. If you file using the accrual method and all at once, you’ll file your expenses and deductions simultaneously. If you file as a cash-basis taxpayer, you will file your deductions and expenses as they arise.
Wrapping things up
Tax deductions for your vacation rental property can reduce taxable income and let you keep more money in the bank.
To harvest as much savings as possible, it’s essential to understand the rules and accurately track your income and expenses as legally allowed. In addition to paying state and local income taxes, vacation rental owners are also responsible for collecting lodging or occupancy taxes from their guests.
The takeaway:
- 14-day and 10% rule govern your vacation rental tax deductions
- If your vacation rental is utilized as a rental for 15 days or more in a year, you can file deductions.
- If it is used for 14 days or fewer, you do not need to file the income as it is considered a personal rental.
- Always provide online booking platforms with a W-9 form.
- Vacation rental property owners may have to pay self-employment tax.
- The IRS allows rental property owners to deduct a variety of business and operating expenses, including service fees, maintenance, cleaning, utilities, and many others.
- Most states, counties, cities, and municipalities also require owners of a vacation rental property to collect, file, and pay lodging or occupancy taxes.
