Creating strategies to be more profitable isn’t just about getting more bookings and increasing rental income. You could save yourself thousands of dollars by understanding more about vacation rental tax deduction rules.
Depending on your annual rental income, you might be able to deduct up to $25,000 in losses each year.
There is no reason to leave any money on the table. To help you understand the IRS and its rules better, see this comprehensive guide about the tax implications of short-term rentals.
Complete list of vacation rental tax deduction rules
Your guests pay for lodging taxes, but you are responsible for collecting them and filing them (along with income taxes).
You can get tax breaks on short-term rental insurance, utility bills, and property taxes.
There are also many operational expenses you can write off (e.g. repairs, maintenance and improvements, cleaning, marketing, and advertising costs for your rental business).
If you incur transportation expenses to collect rental income or to manage your property, they are deductible.
You can choose to depreciate the value of your vacation house “on paper”—even if in reality its value grows.
You can’t apply for rental property tax deductions if you use your house for personal purposes for more than 10% of the days you rent it out, or if you rent it for a maximum of 14 days.
You need to ensure you divide your personal expenses from rental expenses that can be categorized as a part of business operations.
If as a vacation rental owner you registered a short-term rental business, you may be able to apply for a Qualified Business Income (QBI) deduction.
In most cases, you will use the Schedule E or Schedule C form to write off your taxes.
Tax season begins in late January and ends in mid-April.
As a cash basis taxpayer, you report income when you receive it. If you opt for the accrual method, you report income when you earn it.
Income taxes vs lodging taxes: What’s the difference?
Income taxes are federally regulated and levied directly on your personal income by the government, while lodging taxes are paid by the guests themselves, but you still need to collect them.
Lodging tax requirements vary by city, country, region, and state. For example, the lodging tax in Texas is 6% while in the District of Columbia, it’s almost 15%. In Alabama, the lodging tax is 4%, with the exception of the lake area where it is higher (5%).
This is why it’s important to do your research and inform yourself about the taxes you are obligated to pay depending on the location of your vacation rental.
Bear in mind that, as a short-term rental owner, you have to pay both income taxes and lodging taxes on your vacation rentals. It’s not as bad as it sounds, though, since there are many tax benefits of running a vacation rental.
What are the tax benefits of owning a vacation rental?
As a short-term rental owner, you can benefit from a number of tax benefits. For example, if you plan on advertising your rental, the expenses can be deducted from your taxable income.
Now let’s look at some of the main other ways you can make tax savings.
Get tax breaks on insurance, utilities, and property taxes
As a property owner or a property manager, you get tax breaks on:
- Vacation rental insurance like Safely: Most homeowner insurance policies are not sufficient when you rent your home and use it for commercial purposes, which is why short-term rental insurance is considered a valid business expense.
- Utility bills: Water bills, electricity bills, and even internet service can all be deductible as utilities.
- Property taxes: You can deduct mortgage and real estate taxes as you would on your primary residence.
Deduct operational expenses
There are also many operational expenses you can write off when you run a vacation rental. Here’s a list of examples:
- Repairs: Both service fees and materials can be deducted
- Maintenance and improvements: From paint jobs to lawn maintenance
- Marketing and advertising costs: These count as a business expense—for example, the cost of an Airbnb listing can be deducted from your taxable income.
Bear in mind it’s different in situations where you’re a co-owner of a vacation home you’re renting. Here’s an example. Let’s say you own 50% of interest in a rental house. If you paid $700 for necessary repairs, you can deduct half of it as a rental expense—$350. You are entitled to ask for reimbursement for the remaining half from the co-owner.
Tax deduction and transportation expenses
If you incur transportation expenses to collect rental income or to manage your property, you’re looking at another deduction option. If you use your home as a principal place of business, you can easily do this. In other cases, the expenses are nondeductible.
Deducting your expenses is possible in two following ways:
- You can deduct actual expenses
- You can deduct at a standard mileage rate for business use (for 2022, this amounts to 58.5 cents per mile)
To deduct the expenses, you must keep records of your travel expenses. You can find more information about this in IRS Publication 463.
Write off depreciation
By definition, depreciation is a capital expense. It offers a way to recover your cost in a rental property and it must be taken over the expected life of the property (this is called “useful life” and is typically 27.5 years).
In layman’s terms, you choose to depreciate the value of your vacation house “on paper”—even if in reality its value grows. This is how you can lower the tax liability and deduct expenses from your rental income. Also, it’s not possible to depreciate the value of the land itself since it never gets “used up.”
You can begin to write off the depreciation of your vacation home as soon as your rental is fit to host guests.
Important vacation rental property tax deductions rules
Tax deductions are great but you need to ensure you’re eligible according to the IRS and their guidelines. Here’s an overview of the three most prominent rental property tax deduction rules you should bear in mind.
1. Minimum time requirements to qualify for deductions
There is a difference between renting a residential property and a vacation property. According to the IRS, the property you’re renting is to be considered residential if you use it for personal purposes during the tax year for more than 10% of the total days you rent it out, or if you rent it for a maximum period of 14 days. If that’s the case, you can’t apply for rental property tax deductions, but you also don’t need to report your rental income.
2. Tax breaks on certain operating expenses
As we mentioned, operational expenses related to your rental property are subject to tax deductions. However, you need to ensure you divide your personal expenses from rental expenses that can be categorized as a part of business operations.
Here’s an example. You may have a dedicated home office that you use for managing your short-term rental business. In this case, you could be eligible for deductions (e.g. office equipment and supplies). The same goes for vacation home insurance. Comprehensive insurance policy providers such as Safely, are also deductible. It’s also smart to ask for a security deposit for property management to protect your vacation rental from guests’ negligence or carelessness.
Major rental listing services have some insurance policies in place. For instance, there is Vrbo damage insurance and AirBnb’s Host damage protection that provides hosts with $1 million coverage.
3. Qualified Business Income (QBI) deduction requirements
If as a vacation rental owner you registered an official short-term rental business, you may be able to apply for a Qualified Business Income (QBI) deduction. With a QBI deduction, you could save up to 20% of your rental income. The requirement is that you provide at least 250 hours of rental service per year. You are obligated to keep records such as time reports, logs, and other business documents.
How do you calculate the tax on a vacation rental?
In most cases, you will use the Schedule E or Schedule C form to write off your taxes. See the table below to understand what is each respective form used for (both are a part of Form 1040).
Form 1040 is used by U.S. citizens for filing an annual income tax return.
Form 1040-SR is an alternative form to Form 1040 for senior U.S. citizens (65 years and up).
Schedule E tax form is used to report income or loss from rental real estate. It’s a good option if vacation renting is more like a side hobby than a full-time job for you.
Schedule C tax form is used to report income or loss from a business you operate as a sole proprietor. If you’re a homeowner or a property manager who runs a vacation rental business full-time, then this is the form for you.
You may also need to file Form 6198 and Form 8582 if you have a loss from your rental real estate operations. Form 4562 is used for claiming deductions for depreciation and amortization.
Tax season begins in late January and ends in mid-April.
You can either use the cash method or the accrual method. As a cash basis taxpayer, you report income when you receive it (regardless of when it was earned). If you opt for the accrual method, you report income when you earn it (not when you actually receive it).
The actual tax calculation for your rental business and all the deductibles depend on various factors. Let’s look at one example.
The person doing the taxes has been actively participating in property management. Think everything from handling repairs personally, collecting rent, and conducting marketing activities. Because of this fact, this person can use the $3000 rental loss to offset their other income.
Tax laws are rather complicated, which is why many people opt for hiring a tax advisor to navigate these confusing waters. However, it gets easier to understand the implications for your vacation rental business once you invest some time to read through the IRS guidelines.
You need four pieces of information:
- Type of rental payments received
- Type of rental expenses paid
- The number of days you rented the property
- The number of days you used the property for personal purposes (if applicable).
There’s also an Interactive Tax Assistant that can potentially be of use to you.
Protecting your vacation rental doesn’t have to hit your profits
As you can see, many of your outgoings are viewed as business expenses, and this includes short-term rental insurance.
So you don’t have to cut any corners—you can follow best practices without it affecting your bottom line.
And remember, Safely doesn’t just protect you and your home—it also includes automated guest screening and a fast and simple claims process that pays 80% of claims in three business days.
Frequently asked questions about vacation rental tax deductions
What vacation rental expenses are tax-deductible?
Tax-deductible vacation rental expenses include:
- Short-term rental insurance (like Safely, which includes automated guest screening)
- Marketing and advertising services
- Travel expenses, cleaning, maintenance and improvements, depreciation, repairs, and utilities
Can you write off a vacation home as a business expense?
Your vacation home is considered a business. This means you can deduct various rental expenses, including short-term rental insurance, property taxes, mortgage interest, and property depreciation.
What is the average tax rate on vacation rental income?
For the tax year 2022, the federal income tax brackets range from 10% to 37%.
What is the standard depreciation deduction procedure for a vacation rental?
For more details about how to handle standard depreciation deduction, see the IRS Publication 527.