When you think about taking your vacation home and advertising it for short-term rental, you may consider the additional income you will receive to be the biggest benefit; but what about tax benefits?
“Tax benefit” may seem like an oxymoron, but when it comes to vacation rental properties, this oxymoron proves to be true.
The Tax Cuts and Job Act (TCJA) went into effect in 2018 and offers tax benefits for rental a property in a variety of ways, but there are also other tax benefits that can be implemented when filing your income tax return. You just have to know what these deductions are and how to claim them.
Claiming Deductions
The TCJA and the IRS offer vacation rental property owners a variety of deductions they can apply to their income taxes. These deductions are listed below with details as to how you can claim them.
Pass-Through Deduction
The first deduction of the TCJA is called a pass-through deduction. This deduction is only eligible to vacation rental properties whose activity is recognized by the IRS as a business. The rental cannot be an investment property or hobby to qualify for this deduction.
The deduction amount can vary depending on your taxable income and your earnings from the property, so you will need to have this information readily available when you file your income tax return.
Simplified Write-Offs
The next deduction is simplified write-offs. Until 2022, a host can write off all of their personal property expenses purchased for the business. Personal property is anything that can be removed from the building, such as furniture, appliances, and décor; however, this section of the TCJA can also purchases made towards additional operating systems, such as security systems, fire protection, and roofs.
If you rent your property over 50% of the year, you can deduct up to $1 million of this personal property or operating costs that were purchased for the rental property. Again, you will need to have proof to back this up. You will need to produce receipts showing the purchases that were made went directly into the operation of the business. The best way to prove this is to purchase expenses using a business bank account or credit card. However, if you do not have a business bank account or credit card, you can prove this by producing itemized receipts showing the purchases.
Claim Operating Costs
Operating costs are another deduction that you should claim to benefit from owning vacation rental property. These are intangible operating costs, such as cleaning expenses and legal fees that have gone into the operation of your business. These expenses are deductible if you claim them on your tax return.
If you have incurred operating costs through using a business bank account or credit card, this will be easy to brandish; however, if you have used a personal account, you will need to prove these costs in an itemized fashion.
Inventory Purchases
If you have purchased consumables for your business, you can keep the receipts from these purchases and claim the deductions on your tax return. Some of these supplies may be linens, toiletries, and utensils. Keep receipts from any purchase made towards your rental property to claim the full deduction of the investment.
Credit Card or Loan Interest
If you have used a personal credit card or a loan to pay for expenses for your vacation rental property, you can use the interest from these payments to apply to your business deductions. The only stipulation to this deduction is that this deduction must be claimed as a business expense, so you must prove the credit card or loan was used for the business only.
Host Sites Fees or Subscriptions
Property hosting sites, such as Airbnb, will charge a fee to list on their platform. This fee may be 3% of the cost of each reservation or a flat $499 cost per year. Regardless of the method, this fee is a deduction for your vacation rental property.
If you are utilizing the by-the-booking method of 3% per reservation, you will want an organization method for calculating these fees. Vacation rental software will include accounting and reporting features, but if you do not use vacation rental software, your other accounting software should be able to pull this information.
These fees can add up to a large deduction, so you will want to organize these in a manner where you can claim them.
Travel Expenses
While it may not be common, there are times you will have to travel to your vacation rental as part of the business operations. Keep track of the expenses accrued during your travel to the property; especially if you travel a long distance to get to the property. Receipts showing you traveled to the property to perform maintenance or repairs at the property will allow you to claim this deduction.
Additionally, there may be a business opportunity or seminar that you are required to attend to grow your vacation rental property. Lodging, meetings, and training can all be deducted, so long as you have the receipts showing that you accrued these costs because they were directly related to the rental property.
Conclusion
The best way to ensure you are claiming the maximum amount of deductions is to have an organized accounting method. You have the option of filing your tax return yourself or hiring an accountant to file it for you.
If you hire an accountant, the accountant will request receipts and expense reports showing the number of purchases and investments that went into the business that can be claimed as a deduction. You will want to have these receipts and reports easily accessible for your accountant to go over.
These are important tax benefits that every vacation rental owner should know; because knowing the amount of tax benefits that you can claim can be the difference in having a mediocre vacation rental or a profitable vacation rental.
