Every business has one thing in common: taxes. While no one likes paying them, if you have a large tax bill to foot, chances are your vacation rental business is doing well and producing a nice revenue stream. Of course we all want to keep our taxes as low as possible, and luckily there are a number of deductions available to help mitigate the burden.
This guide will give you a basic understanding of what kind of deductions may be available to you and your business, but we always recommend consulting a tax professional to ensure your taxes are figured correctly.
What type of property do you own or manage?
Different types of properties are eligible for a variety of deductions. Your property may fall under one or more of these three categories:
- A primary residence that is only rented out when you are not using it.
- A primary/secondary residence where a room or rooms are rented short-term only.
- Investment property that is rented out the majority of the year.
If you are renting out a room in your private residence or are only renting the property for 14 days or less per year, there are no taxes that will need to be paid. While you are of course welcome to take advantage of some tax deductions for mortgage interest, real estate tax, etc., this is not considered a rental and therefore you do not have the ability to claim any deductions associated with the rental.
Personal use of the property is the difference between an investment property and a residence. You are allowed up to 14 days per year of personal use of the property without the property being considered a residence.
Personal use is defined by the amount of time you personally - or anyone else with an ownership interest in the home - uses the property as a residence. Generally, others with an ownership interest are family members, including spouses, siblings, half-siblings, parents, grandparents, children and grandchildren.
This stipulation only holds true if the person using the home is not paying a fair amount of rent for the property. If you have a tenant and that tenant allows you to stay in the home for any period of time, that time must be included when determining the number of days the home was used personally by the owner. Any time spent at the property performing repairs and maintenance do not count as personal use.
For example, if you have a property that you’re renting out to your sister and she’s paying a fair amount of rent, this is not considered personal use. If you visit your sister at the property and stay for more than 14 days, even with the permission of the tenant, you must count this time as personal use.
If a property does fall under the personal use guideline for a portion of the year, you are required to prorate expenses when figuring any deductions. This is a simple formula:
- Days rented ➗ Days of personal use = Ratio for your expense deductions
Only days rented can be counted, so you must only count these days when figuring the ratio.
If the property is considered a residence using the 14 day rule, your deductions can only be less than or equal to the amount of rental income. If the home is not considered a residence, you can deduct more than the rental income.
Consider looking into options to incorporate, as corporate tax deductions may be greater than those available to sole proprietorships. You would want to speak with a business attorney and/or tax specialist about how this option may or may not benefit you and your specific circumstances.
If your home qualifies as a residence and you have rented the property for at least 15 days, vacation home rules will apply, limiting deductible expenses to less than or equal to any rental income. You will be required to deduct expenses in a specific order:
- The rental portion of mortgage interest, real estate taxes and casualty losses
- Any expenses directly relating to the rental property. These expenses can include marketing, office supplies, legal fees, etc.
- Expenses involved with maintaining the rental property. These expenses may be deducted up to the actual rental income minus any deduction from the first two items.
- Depreciation to the rental property. Again this is only allowed up to the amount of rental income minus any deductions from the previous three items.
What are common vacation rental tax deductions?
What deductions you can take depend on your personal situation, local and state laws and other considerations that may affect the rest of your tax filing. It is important to seek the advice of a tax specialist when figuring these deductions. Below is a list of some of the most common deductions as defined by the IRS:
- Loan interest
- Insurance fees
- Cleaning and maintenance costs
- Legal fees
- Property management fees
- Transportation expenses (including auto and air)
The purpose of this guide is to give you a basic understanding of what kind of tax deductions you can expect. As you can see, this is a somewhat complex issue and determining how your property is classified will determine what kind of deductions you are allowed to take. 14 days is the basic rule of thumb when figuring out if your property is considered a residence or an investment property.