Tax Rules for a Vacation Rental Property Made Simple

Tax Rules for a Vacation Rental Property Made Simple

Although the tax rules for vacation rentals may seem intricate, understanding them shouldn’t be rocket science. To make things easier for you, we answered the most common questions related to vacation rental taxes and put together this FAQ.

Read on to get to grips with the basics of vacation rental property taxes and rental expenses. To learn all the ins and outs of the tax laws and regulations for vacation rental owners, you can also refer to the IRS Publication 527.

Taxes and rental expenses for a vacation rental property

Keep in mind that the information provided in this article cannot be considered tax advice for your vacation property. Always consult with your tax advisor or another certified tax professional and the IRS’s tangible property regulations if you feel unsure about taxes or face any tax issues. Paying taxes on vacation property listings can be complex, and that includes your deductible expenses.

 Should I Pay Tax on My Vacation Rental?

To understand whether you need to pay any taxes, you should first know the difference between a personal residence and a vacation rental home. You also need to familiarize yourself with the 14-day rule, which can have a big impact on how you calculate your taxes.

What Does Personal Use of Property Imply?

Are you using your vacation rental property from time to time as a second home? Or maybe your relatives and friends spend their holiday in your vacation home? If this is the case, it will affect how you should work out your taxable income and possible deductions.

As you do not want to get in trouble or get fined, it is important that you understand what the Internal Revenue Service (IRS) views as personal use. According to them, personal use is the “use by the owner, owner’s family, friends, other property owners, and their families. Personal use includes anyone paying less than a fair rental price.”

A day of personal use of a dwelling unit is viewed as any day that the property is used by you, a family member, or a friend and they do not have to pay what is viewed as a market-related rate for the vacation home.

However, if you spend a day working full-time to repair and/or maintain (not improve) your property, this time is not regarded as a day of personal use. This is essential for hosts to know as this information can affect your deductions.

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What Is the Difference Between a Vacation Rental Property and a Personal Residence? [14-Day or 10% Rule Explained]

According to the US tax authorities, the difference between a vacation rental property and a personally-inhabited residence is based on the 14-day rule. If you rent out your property for only two weeks (14 days or fewer during a year) or less than 10% of the total days you rent it to guests, it’s considered a personal residence by the IRS. In this case, you do not have to report the rental income.

There is no limit to how much you can earn, you can leave the total amount of rental income to yourself. Keep in mind that you won’t be able to deduct expenses incurred from renting your vacation home property on your tax return. However, you still be able to deduct mortgage interest and property taxes.

On the other hand, if you rent out your property for more than 14 days during a year or more than 10% of the days it’s rented, you should include all your rental income in your reported income. If you use the property as your personal residence too, make sure to divide your expenses between the personal use and rental use.

What Is Considered Rental Income?

If you exceed a 14-day limit, you must report your income to the IRS. Vacation rental income refers to any payment that you have received for renting out your property, including security deposits or any other fees that you charge. However, if you have returned the full security deposit to the guest after they have checked out, this amount should be excluded.

Depending on your cancelation policy, you might receive income for canceling a reservation. This amount should also be considered as rental income.

Rental expenses and vacation rental tax deductions and number of days of taxable income

How to Report Your Rental Income to the IRS?

When calculating your net income or loss for rental activity, you might have to do more than simply list your income and business expenses on Schedule E (Form 1040). Depending on your type of activity, you might have to use other forms.

What is the difference between a short-term rental tax form Schedule E and C?

Schedule E (Form 1040) is the basic form for reporting rental income and expenses. It should be used if you rent out your property for additional income and managing your short-term rental is not your primary activity.

However, if you offer substantial services in addition to renting out your property or the rental is part of a business or trade, you will need to complete Schedule C (Form 1040).

Substantial services refer to hotel-like services like providing maid services or changing linen/towels regularly throughout your guests’ stay. In this case, the IRS may consider that you run a hotel, rather than a vacation rental.

How Do Vacation Rental Property Deductions Work?

As a host, you will know only too well that there are many expenses to maintain your property and offer a memorable experience. Many of these expenses are tax-deductible. By taking the time to keep a detailed record of these expenses, you can end up saving yourself a lot of money.

All about taxes for a vacation rental property

1. Tax deductions if your property is a personally-inhabited residence

If your property is used as a home and you rent it out for 14 days or fewer during the year, you should not use Schedule E (Form 1040). In this case, the main function of your property is not viewed to be a vacation rental.

In other words, you do not have to report the rental income and pay taxes linked with renting out your property. Instead, you will use Schedule A (Form 1040) to report any expenses related to your primary home. Examples of deductions that you can include are property loss, property taxes, or mortgage interest.

2. Tax deductions for a property used both as a vacation rental and personal dwelling

If you use your property as your primary residence and at the same time rent it out for 15 days or more in a tax year, in this scenario, you may deduct rental expenses related to renting your property. However, first off, you need to prorate your deductible expenses using the following formula:

Total number of rental days / Total number of days used for personal and business purposes.

For example: You used your vacation rental for 80 days and you rented it out for 140 days. In this case, you will divide 140 by 220. Thus, you can deduct 64% of the relevant expenses.

The following are some examples of expenses, which can be deducted in this case:

  • Advertising and marketing
  • Commissions paid to vacation rental platforms
  • Legal costs
  • Office Supplies
  • Expenses relating to operating and maintaining your vacation rental
  • Depreciation
  • Home mortgage interest
  • Real estate taxes
  • Casualty losses

Number of days for a real-estate vacation home wirh income taxes

3. Tax deductions for vacation rental properties

If your vacation rental is not used as a primary residence, property owners can usually deduct the ordinary expenses that they had to pay to manage and maintain their vacation rental property. In short, these are any expenses in the industry to keep your property in proper condition. These include:

  • Home office
  • Advertising
  • Travel/Transportation
  • Mortgage interest
  • Fees charged by property management companies, real estate agents, and/or vacation rental platforms
  • Property and rental taxes
  • Insurance
  • Cleaning and other relevant supplies
  • Depreciation
  • Utilities
  • Maintenance and/or repairs
  • Expenses related to creating a memorable guest experience such as welcome baskets.

4. Additional vacation rental tax deductions you can take advantage of

In 2017, the former president of the USA, Donald Trump, introduced a few extra tax benefits that owners of vacation rental properties can potentially take advantage of till the end of 2025. These include:

A pass-through business tax deduction

Hosts who own their rental property personally or via a partnership or LLC may deduct an amount of up to 20% of the net rental income to lower their tax liability. However, if your business surpasses $157,000, your deduction will be limited to the higher of 50% of total wages paid or 25% of total wages paid plus 2.5% of the cost of tangible depreciable property, like real estate.

Property taxes on a vacation home for real estate

A new deduction for significant improvements

Section 179 of the tax code allows vacation rental operators to deduct the cost of fire systems, security systems, roofs, and HVACs. The amount that can be deducted for personal property under Section 179 was raised to $1 million starting in 2018; previously it was $500,000. Section 179 is applicable only when your home is rented more than 50 percent of the time.

A bonus depreciation deduction

This deduction allows a 100% deduction of personal property used in business, including appliances and furniture, all in one year.

Seven Important IRS Rules to Keep in Mind as a Vacation Rental Owner

Even with a number of resources available, it still requires some insight and work to make sense of vacation rental tax rules. It can become even more challenging when you have multiple properties in your portfolio. Irrespective of if you have only one or a number of rentals, implementing the following advice can reduce your workload and stress.

Taxes for a vacation rental property and regulations

1. Learn about state and local laws and regulations

As tax rules and local laws and regulations differ from one state to the next, it is important that you familiarize yourself with the state and local government laws. In some locations, the amount that you make on your short-term rental may impact everything starting from licensing to taxation.

For example, some states collect hotel tax even on short-term rentals, while others don’t. You also need to read up on rules regarding any homeowners’ associations (HOAs).

2. Keep thorough records of your rental periods

As the 14-day rule can make a massive difference, it is key that you have a detailed record of when you rented out your property, when you used it for personal use, and when you were busy with repairs. By taking the time to ensure your rental logs are up to date, it will be much simpler when it is time to complete your tax return.

3. Record all your business-related expenses

As you are legally allowed to deduct ordinary expenses that were necessary to run your vacation rental business, it is crucial to keep an accurate record. Do not put it off till last. If you have to analyze a year’s bank statements in a rush to meet deadlines, you are bound to make mistakes (and hate yourself for making an easy task more difficult).

Real estate vacation home for rental property tax deductions

4. Make sure to fill in a W-9 form

If you do not share a completed W-9 form with the vacation rental platforms that you use, they are obligated to withhold 28% of your rental income. As your effective tax rate, most of the time will be less than 28%, you will give the relevant authority the right to keep your overpayment for a year. However, if you file the W-9 form, the vacation rental platform will be able to decrease the percentage and give access to your entire rental income.

5. Deduct host service fees

Vacation rental platforms such as Airbnb usually submit a 1099 form to the IRS. On this form, they will report your rental income and the host service fees that you had to pay. As you can deduct this entire host service fee from your rental income, it is important to keep a record of it as well. While you might think that it is a minor expense, it adds up. After all, every bit helps.

6. Don’t forget about occupancy tax

Hosts are often required to collect occupancy tax directly from their guests. In this case, they will also be responsible for submitting the occupancy tax that they have gathered to the local tax authority.

However, in certain states and cities, some vacation rental listing sites such as Airbnb can collect and submit the money on behalf of the host. So, find out who is responsible for collecting and submitting the money in your location.

Also, in certain jurisdictions, occupancy tax can go by another name. For example, in some states, it is referred to as hotel tax, while others call it transient lodging tax.

7. Pay self-employment tax

If you rent out your home and offer services, the IRS may classify you as self-employed. In this event, you will have to pay self-employment taxes in addition to income tax. In short, this amount is to cover Medicare and Social Security contributions for the income that you have generated by running your own business.

Save Time on Property Management to Prepare Your Taxes Right

Even when you are well informed about the tax rules for your vacation rental property, keeping thorough records is a time-consuming process. So, you need all the help that you can get.

The only concern on the host’s mind should be to create a first-class guest experience. Vacation rental software, such as iGMS, can help you save time on other routine tasks like guest messages and cleaning management, ultimately leaving you more time to focus on preparing your taxes and sleep tight at night. iGMS can also help you with many of your other routine tasks, including:

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