Owning short term rental properties comes with different benefits as well as various costs to consider. To capitalize on the pros and maximize your profit, it’s important to apply all possible business expense reductions without compromising the condition of your property and the quality of services that you provide to guests. One of the most efficient ways to do that is to use applicable short term rental tax deductions.
In this article, we’ll present and discuss the 14 main tax deductions that vacation rental hosts can claim to reduce their taxable income and save on the cost associated with Airbnb management and ownership. We’ll also show you how to calculate potential savings and how to report the rental income you generate from your investment property.
What Are Short Term Rental Tax Deductions?
After all, owning and managing a vacation rental property is a business like any other. This means that the Airbnb profit that you generate from your short term rental is considered taxable income for the purposes of the IRS.
At the same time, similar to other business types, your short term rental business is eligible for a range of tax benefits. Indeed, the list of applicable tax deductions might exceed the number of tax advantages available to other businesses.
In brief, certain business expenses can be deducted from your taxable income to reduce the amount of taxes that you pay to the IRS every year. This is a fully legal and transparent way to minimize business expenses and keep a larger portion of your rental income to yourself – to enjoy in your free time or to reinvest in your business by buying a new rental property.
Short Term Rental Property Tax Deductions Requirements
Before you are able to take advantage of available tax deductions for short term rental properties in a compliant way, it’s important to understand what rental activities qualify for these.
To qualify for these tax strategies, your property needs to be considered a full-time rental business.
According to the 14-day rule, this means meeting two requirements:
- Your short term rental property needs to be available for rent for more than 14 days per year, regardless of the actual Airbnb occupancy rate that it generates.
- You and your family cannot use the property for personal purposes for more than 14 days per year or 10% of the total number of rental days per year.
You should be aware of the fact that the time spent on maintaining the property does not count towards the personal use allocation.
Everything described above means that short term rental property tax deductions work for owners who invest in a property with the main purpose of renting it out to third-party guests and earning income in this way. They do not apply to the owners of a second home who plan to occasionally rent out their vacation home when they are not using it.
Short term rental tax deductions for hosts
Now that you know when you can claim tax deductions to reduce taxes on your vacation rental business, let’s take a look at the categories of expenses that qualify for these benefits.
1. Real Estate Depreciation
The first tax deduction available to STR hosts is something that applies to all rental property investors, not just those renting out on a short term basis.
Real estate depreciation refers to spreading the cost of an income-producing real estate property and improvements on it along the useful life of the property. For tax purposes, the useful life of a commercial real estate property – like a vacation rental – is considered to be 27.5 years, as defined by the IRS.
The value of the land on which the property is built is excluded from the depreciation calculation as it doesn’t have a limited useful life. However, some expenses related to the land – like landscaping – can qualify and be included in the formula.
This tax deduction starts working as soon as you begin to rent out your property. So, the sooner you get your new short term rental fixed, furnished, and listed on Airbnb or Vrbo, the sooner you can start depreciating its value.
Real estate depreciation works in a two-fold way. First of all, depreciation brings down the amount of taxable rental income. Second, it protects other short term rental income from taxes.
So, you can apply real estate depreciation as a tax deduction over the first 27.5 years of your vacation rental property.
2. Property Taxes
The second item on our short term rental tax deductions checklist is real estate property tax. Once again, this is not something unique to the short term rental industry, but it’s definitely something that savvy hosts take advantage of to reduce costs and boost profitability.
When it comes to owning a vacation rental property that qualifies as a business, you can deduct the entire amount of property taxes that you pay on an annual basis. This is different from property taxes on a primary residence because homeowners – unlike real estate investors – can write off only $10,000 of property tax. There is no such limit in the case of real estate investors.
3. Property Repairs and Maintenance Expenses
A third tax deductible short term rental expense that you need to take into account is the cost of property maintenance, fixes, and repairs.
Actually, that’s a chief avenue of reducing taxes when it comes to running a vacation rental business. Hosting guests who stay for only short periods of time and who change on a daily basis is associated with significantly more tear and wear than having a traditional, long term rental property.
So, every time you have to fix the sink, repair the home security system, or repaint the dirty walls, remember to keep the invoice to apply it to your tax deductions should tax season come.
4. Vacation Rental Improvement Works
One more – potentially major – expense that you can use to your benefit when filing taxes is property improvement cost. The good news is that there is a long list of items that qualify under this, and the monetary limit is quite high, so it’s safe to assume there is no restriction on how much improvement expenses you can claim if you own a residential property rented out on Airbnb, Vrbo, or another similar platform.
A few examples of property improvement costs include remodeling the kitchen or the bathroom, repainting parts or all of your property, new roofing, and others. Moreover, expenses like home security systems, fire systems, HVACs, and others can also be written off.
5. Mortgage Interest Deductions
Investors who resort to mortgage loans as part of their strategy for financing vacation rentals benefit from certain tax considerations. In specific, you might be able to write off the interest payments on your investment property mortgage, similar to your primary home. Short term rental property mortgage interest tax deductions are reported on Schedule E of Form 1040.
Moreover, in case you have a private mortgage insurance (PMI) on your vacation rental, you can usually deduct this expense as well.
Alternative financing options – different from conventional mortgages – such as FHA loans might also qualify for some deductions under certain conditions. STR hosts should check out what exactly applies to their particular situation for the largest possible savings.
In other words, there is a huge potential to reduce your taxes through the financing of your Airbnb business.
6. Short Term Rental Insurance Premiums
Short term rental insurance is something that investors dread because of the higher price than regular homeowner insurance or even long term rental property insurance. At the same time, this is an absolute must for Airbnb hosts to protect their properties from a wide range of potential risks and themselves from liability.
While rental insurance is not legally required, it presents an important opportunity to protect your investment and yourself from large expenses, especially in states and locations prone to frequent natural disasters.
The great news is that insurance premiums qualify for short term rental business tax deductions under existing legal legislation. Once you factor this into your rental property analysis, you’ll see the huge potential for saving on costs, thus boosting your overall return on investment, without compromising the safety of your investment property.
Meanwhile, in case you need comprehensive Airbnb insurance at a competitive rate, you can check out Steadily.
7. Vacation Rental Cleaning
One major thing that differentiates short term rental properties from long term rentals is the need to clean between guest stays. While this is usually a burden for hosts in terms of time, management, and money, it works to their advantage when it comes to short term rental tax deductions.
Specifically, cleaning fees and housekeeping supplies paid by Airbnb hosts are tax deductible. So, you can maintain your rental in the best, most presentable form to attract more guests, generate positive reviews, and boost your ranking on Airbnb SEO while benefiting from reduced taxable income. That’s a key saving to enter into your Airbnb cleaning calculator.
8. Rental Marketing and Advertising
One more business operating expense that short term rental property owners can claim is any cost of marketing and advertising their property.
This can comprise a very wide range of expenses including but not limited to:
- Designing, building, launching, maintaining, and operating a vacation rental website
- Working on different content and SEO strategies for bringing more traffic to your listing
- Using social media marketing for your vacation rental business
- Running paid ads including Google Ads, Facebook Ads, Instagram Ads, and others
- Email marketing campaigns
- Having ads in magazines, newspapers, and other printed media
Moreover, costs associated with using different short term rental listing marketplaces such as Airbnb and Vrbo also qualify under rental marketing and advertising.
9. Short Term Rental Software Tools
Yet another example of tax deductible short term rental expenses is the cost of various vacation rental software that you use for the running and management of your short term rental. Nowadays, using software tools has become the norm in short term rental management, so you can easily use the related subscription fees and costs to reduce your taxable income.
For instance, tools like the Mashvisor vacation rental property management software platform can help you save multiple hours on the management of your rental business each week. This is achieved through streamlining, automating, and putting on autopilot many of the aspects of running a short term rental business.
How Short Term Rental Software Helps Hosts
The most important features provided by Mashvisor, as the best vacation rental software available on the market, include:
- Vacation rental channel manager: The best Airbnb channel manager helps you bring all your listings under one roof, no matter how many properties you own and on how many websites you list them. In this way, you can eliminate the need to maintain control over numerous platforms and can make sure that you never miss a thing about your short term rental listings, whether it relates to welcoming guests or scheduling cleanings and maintenance.
- Multi-calendar: The Mashvisor multi-calendar functions as an integrated booking system that displays all your listings across multiple platforms. The booking calendar displays available days, blocked days, and booked days so that you are always in charge of your reservations without losing your sanity.
- Unified inbox: The unified inbox brings all your guest communication into a single inbox. This means that you will never miss a guest message and you will always respond on time. This has the potential to speed up booking confirmations, improve guest satisfaction, generate positive reviews, boost rankings, improve your occupancy rate, and bring you more revenue, with zero additional efforts. Actually, a lot of the guest communication can be automated based on events and dates.
- Dynamic pricing software: The Mashvisor dynamic pricing tool allows hosts to optimize their vacation rental pricing strategy through adjusted daily rates. The tool takes into consideration market trends, seasonality, rental comps performance, and property specifications to propose the nightly prices that will maximize revenue and ROI, rather than reservations and occupancy, like most competitors. You can choose whether to entirely automate your dynamic pricing or approve each daily rate yourself.
- Vacation rental website builder: The Mashvisor website builder helps hosts launch their own short term rental website that is optimized for both SEO and guests. This can contribute to your marketing efforts and drive direct reservations to your listings. While reservations from booking channels like Airbnb and Vrbo are at the core of the vacation rental industry, the importance of direct reservations should not be underestimated either.
- Airbnb calculator: The Mashvisor Airbnb calculator provides estimates not only of the expected monthly income for any property rented out on a nightly basis but also of the average daily rate, the occupancy rate, the cap rate, and the cash on cash return. All data analytics are based on reliable short term rental data from multiple sources and reflect the performance of comparable rental properties in the area. You can customize the analysis provided by the calculator to reflect different vacation rental expenses that are tax deductible or not.
- Airbnb data: The vacation rental data helps hosts set up the right pricing and marketing strategies for their properties to enhance income and return on investment. Some Airbnb data points include daily rates, occupancy, monthly rental income, tax deductible short term rental expenses and other costs, cash flow, cash on cash return, and cap rate.
So, while short term rental property management software tools facilitate the management of your properties and boost performance, you can deduct their cost from your taxable income.
10. Host Service Fees
A business expense unique to vacation rentals is the so-called Airbnb hosting fees. Listing channels like Airbnb, Vrbo, Booking.com, and others charge various fees to STR hosts for the services that they provide in return, such as listing, marketing, guest services, tax collection, and insurance.
Since this is a legitimate operating expense that is essential for running a vacation rental business, you can easily claim it on your tax forms. That’s one more way in which you can decrease your costs.
11. Home Office Expenses
Unless you are a large-scale, full-time short term rental property investor, you’re probably running your business from home, which means that you have some sort of a home office.
Actually, you can deduct different types of home office expenses from your taxable rental income. These include things like office furniture (desk, office chair, etc.), equipment (laptop, tablet, etc.), supplies (paper, pens, etc.), and even the part of utilities used for your business (wifi, electricity, etc.).
You should not underestimate the importance of deducting these costs, no matter how small and insignificant they might look. Every little saving has the potential to boost the profitability of your Airbnb-style property.
12. Business Travel Costs
Whether you invest out of state or close to home, you need to visit your investment from time to time. This is key for ensuring that the property is in a good condition, meeting all safety regulations and looking attractive to new guests.
Since this is a qualifying business expense, you can turn travel expenses into a tax deductible short term rental expense, no matter if you drive, fly, or take the train. Just remember to keep relevant receipts for when tax season comes and you have to file your tax return.
13. Pass-Through Business Tax Deduction
Depending on how your short term rental business is set up, you might be eligible for an additional deduction, known as a pass-through tax deduction.
Sole proprietorships, limited liability companies, limited liability partnerships, and S-corporations can deduct the equivalent of 20% of their net rental income from income taxes.
This is a relatively new short term rental tax benefit that was introduced with the Tax Cuts and Jobs Act of 2018. It is based on the principle that the business entity does not pay taxes, and instead they pass through the individual business owner.
14. Management and Legal Fees
Last on our list of key short term rental tax deductions are various fees associated with the running of your business.
For example, if you are not a do-it-yourself host and hire one of the vacation rental property management companies available in your market, you can deduct the Airbnb management fee you pay to them. Considering that most companies charge 25% of monthly income or more, this can add up to a major saving item.
In addition, you can include accounting fees, legal fees, and other professional fees that you need for your rental property.
How to Calculate Short Term Rental Tax Deductions
Calculating short term rental tax deductions
Knowing what tax benefits you are eligible for is different from knowing how to use them to your advantage. Calculating deductions requires dividing the total number of rental days available in a year by the total number of days for which the property is rented (or used for business purposes).
However, this might be easier said than done. You have to know how to record everything right, keep track of all business transactions, and maintain copies of all relevant invoices.
Having an online booking calendar which reflects all available dates and booked dates can be of immense help in this regard. This is one more reason why getting vacation rental software can prove to be of indispensable help.
How to Report Income from a Short Term Rental Business
The process of reporting rental income from vacation properties might be different, depending on how you list your property and how you run your business.
For instance, platforms like Airbnb provide hosts with a readily available 1099 form that you can utilize to report your rental income. If you list on a direct booking website and get reservations and payments there, you need to keep track of all the income you receive from guests.
In addition, you have to carefully and diligently keep records of all expenses throughout the year so that you can include them in your tax deductions.
Saving on Your Short Term Rental Business Expenses
Vacation rental property investments come with many important benefits, and one of them is the multiple short term rental tax deductions that you can claim to lower your taxable income and boost your profit.
From real estate depreciation and property taxes, all the way through property improvements and maintenance works, there are plenty of expenses you can report for tax consideration purposes.
No matter how small a cost might look, savvy STR hosts make use of all available opportunities to lower the operating expenses of their business.
To ensure that you are ready for tax season each and every year, it’s crucial to manage your vacation rental property in an efficient and organized manner that keeps track of all activities, earnings, and expenses. Using a top vacation rental software like Mashvisor can ensure the smooth operations of your rental business throughout the year and your readiness during tax season.