Being a property manager or owner has many perks that people often overlook, such as vacation rental tax benefits and deductions. While there are many expenses and rules to consider when running a vacation rental business, you can rest assured knowing that there are ways to lower your taxable income.
Even if you’ve had a good year financially, writing a check to the government treasury may make you cringe. While there’s nothing you can do to avoid paying taxes, carefully itemized vacation rental tax deductions can cause your bill to plummet and put a smile back on your face.
Each country has its own tax regulations that govern rental properties. Deductions will always vary depending on location, so be sure to investigate your country’s tax code long before you declare your annual rental income.
Want to find out what taxes are deductible if you’re a vacation rental owner in the US?
Before you start tallying federal deductions in the US, make sure you meet the Internal Revenue Service’s basic requirements for rental properties. First, you must rent your property for at least 14 days out of the year. Any less than that, and the IRS considers your rental a second home and some tax deductions won’t apply.
Second, you’ll need to keep track of any time you spend using your vacation rental. Exceed 14 days or 10 percent of the total time your property is used, and you’ll only be able to deduct a portion of some property expenses.
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
If you seldom stay at your rental property, you’ll be able to deduct the full amount in most cases. We recommend always consulting a professional tax adviser to be thoroughly informed.
Here are the top 10 vacation rental expenses you should consider deducting when it comes to filling out your tax return. We created a video back in 2019 to help highlight these expenses but we’ve added a few more to the mix since then!
1. Repairs, maintenance, and cleaning
Even the luckiest property owners should expect to have some repair and maintenance costs. So whether you need a new roof or have to fix a leaky sink, you should plan on deducting any professional service fees and the cost of supplies. Bear in mind that rental property cleaning services are also considered a deductible expense.
2. 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. For more information, check out Publication 587, Business Use of Your Home.
Gorgeous beach houses and scenic mountain retreats are hot rental properties, but the cost to insure them against hurricanes, mudslides and other natural disasters can be hefty. Add in some liability insurance to protect your assets in case of an accident, and well, it’s really no wonder your insurance agent sends you a card during the holidays!
It’s up to you whether you want to keep the card, but be sure to save thevacation rental insurance bill as proof of a valid vacation rental tax deduction.
4. Utilities and taxes
The cost of providing electricity, internet, water and other essential utilities for your rental can easily amount to several hundred dollars each month. Add state and local taxes into the mix, and these potential deductions can be worth thousands of dollars each year.
5. Marketing and advertising
However you decide to advertise your rental property, the money you spend on marketing is completely tax-deductible – even yourLodgify account fees can be deducted as a cost of doing business. Consider paying one or two years’ worth of Lodgify fees upfront, and you’ll not only snag a 20-25% discount, but also a nifty tax deduction.
6. Accounting fees
You may have completed your tax forms with just a pencil and a calculator in the past, but a good accountant can save you more than just time. In 2015, the US Tax Code was a whopping10 million words, so it’s easy for some deductions to fall through the cracks. Save yourself a job and get your accountant to do it – after all, any tax professional will know that the accounting bill you pay is also a valid tax deduction.
7. Towels, sheets, and supplies
It might seem strange, but you can even deduct the amount spent on towels, sheets and other furnishings oramenities that are a requirement of a rental property business. So, be sure to keep all those Bed Bath and Beyond receipts to cash in on later!
One of the most common expenses to deduct is that for depreciation of the property. It’s a capital expense which you can begin to deduct as soon as your vacation rental is prepped and fit for leasing out to guests. Read more in chapter 2 of the IRS Residential Property (including vacation homes) guide here.
9. Vacant rental property
For regular rental property, owners can often deduct costs and expenses for its management and conservation while unoccupied. For vacation rental owners, it could be worth investigating if this expense is deductible for you, too. Especially if your rental has suffered something which has negatively affected booking numbers (e.g. naturaldisasters etc.).
10. Legal fees
You can deduct legal and professional expenses (like tax return preparation fees) and any expense that was paid to resolve a tax underpayment regarding your vacation rental. However, this does not include federal taxes and penalties.
Once you recognize some of your biggest possible deductions, it’s easy to understand why keeping a record of all of your expenses can help you save big. Your record-keeping system doesn’t have to be fancy, but it does have to be accurate and thorough. There are evenfree tools available to help with this!
When to Deduct Your Vacation Rental Expenses
There are two main methods used to report rental income and expenses. The first (and most commonly used) is the cash method, which is when you report your expenses in the same year that you pay them. If you’re an accrual basis tax paper, you report income when you earn it, instead of when you receive it.
It’s important to take advantage of vacation rental tax benefits by saving bills, asking for receipts, and keeping all canceled checks related to your rental property. Store all of these records in a single location, and consider making electronic copies as well. If you’re lucky, your organizational skills will yield plenty of savings when tax time comes around.
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