Vacation Rental Tax Deductions - How to spend smart and save

Vacation rentals are a great way to earn a passive income, but some owners overlook another essential part of owning a vacation home: tax-write offs and deductions. While sharing your income with Uncle Sam can sometimes be a pain, it’s always nice to get a little something back. In this post, we’ll walk you through vacation rental tax deductions and write-offs to help you get the most bang for your buck!

Make Sure You Meet The Requirements

Before you get crazy with tax deductions, you have to be clear about the definition of a vacation home for tax purposes. For your property to be considered a vacation home and not a second home, you must rent it out (and get paid for it) for at least 14 days out of the year. You also must only use it for yourself for less than 14 days (or less than 10% of the annual bookings) to take advantage of the deductions.

Bottom line? If you rarely stay in the home and have a pretty solid calendar of reservations, you can take full advantage of these vacation rental tax deductions.

Depreciation

One of the most significant deductions that come with owning a rental property is the depreciation. This allows you to write off the depreciation of the home even if, as it usually does, the actual value of the home increases. According to the IRS, If your property meets the following requirements, then it is depreciable:

  • You own it
  • It produces income
  • It’s expected to last more than a year and
  • Has a “determinable useful life” (which means it will naturally wear out or decrease in value over time

If your property meets all of these requirements, you can start writing off the depreciation value as soon as the home has been placed in service. You can write off this deduction up until you’ve deducted the entire value of the home or you decide not to use the property as a vacation rental anymore.

To determine the depreciation value of your rental, you have to consider the amount you paid for the property, the depreciation method that you choose and the recovery method. Vacation homeowners love this specific tax break because it reduces the amount of taxes they pay each year and allows them to spread the cost of buying property over an extended period of time.

Repairs & Improvements

One thing you can be sure of is that your property is going to need both routine maintenance repairs and emergency repairs over the course of your ownership. These can add up, but thankfully many of these are tax deductible. When discussing them for tax purposes, however, it’s important to understand the difference between improvements and repairs:

Repairs

If you’re fixing something that is broken or malfunctioning in order to keep the home in working order, that is considered a replacement. Repairs are usually under $500 (think replacing the knob on a washer, fixing a hole in the wall, replacing an outdated shower head). These can be written off your yearly taxes.

Improvements

If you’re spending more money to increase the value of the home, this is an improvement. These are things that aren’t required for the home to be livable but add to the value and overall quality of the home. Things like upgrading the kitchen or getting new floors fall under the improvement category. They usually require a lot more time, work, and money, and can only be deducted as depreciation over an extended period of time. If you do a $10k bathroom remodel, you can’t deduct all $10k in one year, but you can spread it out over time.

Utilities

Unless you’re renting out a tent, your vacation rental is going to come with utilities that need to be paid for. This includes water, gas, electricity, and the internet. These expenses can quickly pile up over time. Thankfully, you can deduct the cost of these expenses for your vacation rental. This can up to hundreds of dollars a year in savings.

Loan Interest

Loan interest, for homes that have a mortgage, usually ends up being the single highest expense that vacation homeowners may have on a long-term basis. The interest that you pay on your mortgage (both primary and secondary) can be claimed. If you used a credit card to buy items for your property, the interest you pay on that credit card could also be deducted. If you took out a HELOC to pay for repairs and upgrades to the house, the interest on that loan could also be deducted.

Taxes

You’ll pay taxes on your rental all year long. From sales and property tax to state and local taxes, Uncle Sam’s portion can make up a big chunk of the expenses you pay for your property. Thankfully, many of these taxes can also be written off and deducted from your taxes. While some choose to hire an accountant to take care of the facts and figures, with a basic understanding of vacation rental accounting, you can manage your bookkeeping and taxes on your own.

Maintenance and Cleaning

Just like your primary residence, your vacation home will need to undergo routine maintenance to stay at its best. Things will go wrong when you least expect it and require immediate attention as well. Whether you do the routine home maintenance on your own or hire someone to do it for you, it’s going to cost you. The same goes for cleaning. Since cleanliness is of the utmost importance to your guests, hiring a professional cleaning crew to come in before and after guests arrive is a smart investment. Both the cost of labor and supplies for maintenance and cleaning can be vacation rental tax deductions. 

Travel Expenses

The beauty of owning a vacation rental is that you don’t have to live locally to do it. It’s actually one of the biggest perks of owning a vacation rental—having a space that you enjoy traveling to and vacationing in. But since the vacation rental is a business, you can deduct the costs of getting to and from the home as a business expense!

Management Fees

Running a vacation home, especially from a distance, can prove time-consuming and costly. It involves not only being available to assist guests whenever they need it but staying on top of what the home needs, scheduling reservations and managing the accounting, taxes, marketing, and advertising. Many busy homeowners choose to hire a property manager to be their eyes and ears. Their job is to take care of the details so you can go about your life (and collect the income). If you decide to use a property management company, you can deduct their fees when it comes to tax time.

Final Thoughts

It’s pretty safe to say that vacation homeowners prefer to make money on their rentals vs. spend money on their rental. But, you have to spend a little money to make money in this industry, and the fact that you can write off some of the significant expenses makes it easier and more affordable to run a vacation rental successfully. It’s critical to do your research when it comes to vacation rental deductions. You don’t want to miss anything. Doing online research is a great start, but speaking with a tax professional is even better.

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