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Tax Rules For Vacation Rentals: Expenses & Deductions

Tax Rules For Vacation Rentals: Expenses & Deductions

Owning or managing property has many benefits that people overlook, such as the benefits of vacation rentals and tax deductions. While there are several expenses and rules to consider when operating a vacation rental business, you can be sure there are ways to lower your taxable income.

Even if you've had a good fiscal year, sending a check to the treasury may make you cringe. While there is nothing you can do to avoid paying taxes, a careful deduction of taxes on a vacation rental can lower your bill and put a smile on your face at the end of the day. Some states have tax laws governing rental properties. Deductions always vary by location, so be sure to understand your state's tax rule on vacation rentals before reporting your annual rental income. Want to know what taxes are deductible if you have a vacation rental?


Basic requirements for vacation rental property expenses

Before you start counting federal deductions in the United States, make sure you meet basic rental properties' income service requirements. First of all, you must rent your property at least 14 days a year. Less than that, and the IRS will treat your rent as a second home, and some tax deductions will not apply.

Secondly, you will need to keep track of your time spent using vacation rentals. You exceed 14 days or 10% of your property's total period of use, and you can only deduct part of your real estate expenses.

Personal use is defined to mean when a seasonal rental is used by:

  • A family member (or someone with interest in it), unless you are using the property as your primary residence and paying the fair rental value.

  • Anyone that allows you to use another residence under a contract

  • Anyone who pays less than the fair rental price

  • You or any other person with interest in the property

If you rarely stay in the rented property, you will be able to deduct the full amount in most cases. We advise that you consult a professional tax advisor to be fully informed.

Here are some vacation rental expenses you should consider deducting when filing your tax return. 

  • Depreciation: One of the most basic expenses to deduct is the depreciation of your property. This is a capital expense that you can start by deducting as soon as your vacation rental is ready and qualified to be rented to customers. 

  • Insurance: Beautiful beach houses and quaint mountain inns are attractive rental properties, but the cost of insuring them against hurricanes, landslides, and other natural disasters can be high. Add in liability insurance to protect your belongings in the event of an accident. Be sure to keep your vacation rental insurance account as proof of a valid vacation rental income tax deduction.

  • Legal fees: You can deduct legal and business fees (such as tax preparation fees) and any expenses paid to settle an underpayment of tax on your vacation rental. Though, this does not include federal taxes and fines.

  • Marketing and advertising: Regardless of how you decide to advertise your rental property, the money you spend on marketing is fully tax-deductible. 

  • Repairs, maintenance, and cleaning: Even the luckiest homeowners should expect repair and maintenance costs. Therefore, if you need a new roof or fix a leaking sink, you should plan to deduct professional service charges and supply charges. Please note that rental cleaning services are also considered a deductible expense.

  • Towels, supplies, and sheets: You can also deduct the amount spent on sheets, towels, and other furniture or services needed by a rental company. Therefore, be sure to save all those receipts as evidence.

  • Transport costs for maintenance and management: You can also deduct local transportation expenses to collect rental income, maintain or manage your vacation rental property. This can be done if your rental is your primary place of business. 

  • Utilities and taxes: The cost of providing water, electricity, internet, and other basic rental services can easily reach a few hundred dollars a month. Add local and state taxes to the mix, and those potential deductions can be worth thousands of dollars each year.

Once you've recognized some of the biggest possible deductions, it's easy to see why keeping track of all of your expenses can help you save a lot. Your data logging system doesn't have to be fancy, but it should be accurate and complete. 


When to deduct vacation rental expenses

There are two main techniques used in reporting rental income and expenses. The first is the cash method of accounting, which is when you report your expenses in the same year you pay them. If you have an income tax document, report your income when you earn it, rather than when you receive it.

It is important to take advantage of the rental tax benefits by saving on bills, requesting receipts, and keeping all canceled checks related to the rental property. Keep all of these documents in one place and consider making electronic copies if needed. If you're lucky, your organizational skills will save you a lot at tax time.


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