10 easily overlooked tax deductions vacation rental hosts can claim

In the short-term rental (STR) industry, even small operators need to treat their vacation rental like a business in order to succeed. Luckily, the IRS agrees, so you can get businesslike deductions when income tax time comes.

STR operators are allowed to deduct “ordinary and necessary” expenses related to their business. There are plenty of deduction opportunities for your vacation rental business, but they might not all be obvious, so it pays to do a little research to make sure you aren’t missing out. Homeowners and property managers should especially pay attention to the Tax Cuts and Jobs Act deductions that became available starting with the 2018 tax year.

Keep in mind that these deductions relate to federal income tax. It’s important to understand the difference between income tax, which you pay to the federal government and some state governments based on your income, vs. lodging tax, which is a local tax your guests pay on the cost of renting short-term accommodations from you.

As a host, you don’t actually pay lodging taxes out of your pocket, but you’re responsible for collecting the tax and passing it on to the appropriate tax authorities. There are no deductions you can claim for lodging taxes. Avalara MyLodgeTax can help automate and simplify lodging tax compliance for short-term rental owners.

To maximize your federal income tax deductions, your home must be classified as a full-time rental business. That means it’s used by you for personal stays for 14 days or less per year, or 10% or less of the total annual rental days, whichever is greater. Days primarily spent repairing or maintaining the property don’t count toward personal use days.

If you use your rental home for personal use for more than 14 days a year, you’re only allowed to make deductions in proportion to the amount of time the property is being rented by guests. If you only rent out part of the property, you’ll only be able to deduct expenses in proportion to how much of the property you rent to guests.

A benefit of using your property as a full-time rental business is that you may be able to deduct up to $25,000 in losses each year, depending on your income and other circumstances. If your property is only a part-time rental business, you won’t be able to deduct a loss when you spend more on the property than you earn in rental income.

On the other hand, if you offer your property for short-term rental for only 14 days or less during the year, and you use the property yourself 14 days or more — or at least 10% of the total days you rent it out — then you do not need to pay income tax on that rental income.

1. Pass-through entities

Residential landlords who own their rental property through “pass-through” entities — including sole proprietorships (meaning they own the property individually), limited liability companies, or partnerships — may be eligible to deduct an amount equal to 20% of their net rental income. This is a personal deduction that can be taken even if you don’t itemize. However, it’s not an “above the line” deduction that reduces adjusted gross income. Eligible taxpayers can claim the deduction for tax years beginning after December 31, 2017, and ending on or before December 31, 2025.

2. Repairs and maintenance

Routine expenses for repairing or maintaining your property are deductible as business expenses. However, substantial repairs or additions that are considered an “improvement” to the property must be capitalized and depreciated, meaning the costs are recovered over time by deducting some of the cost each year. Examples include projects such as replacing a roof, installing a security system, or building an addition. 

3. Bonus depreciation

In some cases, business owners may be able to claim “bonus” depreciation, which allows them to deduct more of the costs of assets used in their business up front rather than depreciating it evenly over time. The Tax Cuts and Jobs Act allows business owners to deduct a percentage of the cost of property such as appliances and furniture within the first year of purchase.

4. Mortgage interest

The Tax Cuts and Jobs Act lowered the amounts that can be taken as personal deductions for mortgage interest on primary and secondary residences. However, these limits don’t apply to rental businesses, so you can deduct all mortgage interest on rental properties as a business expense.

5. Loan interest

If you take out a loan to start your business or pay for improvements such as appliances, furniture, or repairs, you can deduct the cost of interest payments on those accounts. You must use the loan funds for business expenses in order to deduct the interest expense.

6. Property taxes

Personal deductions for property taxes are capped at $10,000. However, similar to the mortgage interest deduction, the limit doesn’t apply to properties operated as rental businesses. Owners of rental properties can take the full amount of property taxes as business deductions.

7. Insurance

You can deduct the cost of any insurance that covers your rental property. You can also claim a deduction for private mortgage insurance (PMI) premiums on rental property for the year they were paid. However, if you prepay PMI premiums for multiple years in advance, you can only deduct the part of the PMI payment that applies to that year.

8. Marketplace fees

Marketplaces such as Airbnb and Vrbo charge STR operators fees for their services. These fees are completely deductible, so make sure you keep track of them.

9. Travel and transportation expenses

When you travel overnight for business related to your vacation rental, you can deduct airfare, accommodations, mileage, meals, and other travel expenses. This could include activities such as:

• Traveling to your rental property to do repairs or maintenance
• Learning related to your rental, such as classes, seminars, conventions, or trade shows
• Meeting with business associates who work with you in your rental business

You can also deduct mileage for travel closer to home in order to visit your property or other related travel, such as going to a store to pick up supplies or equipment. Keep in mind that any travel related to improvements, as opposed to those for repairs, may need to be added to the improvement’s tax basis and depreciated.

10. Home office

If you manage your rental business from a home office, you may be able to deduct expenses related to the office, including equipment, supplies, and a percentage of many of the costs of running your home.

While many tax deductions for your rental business seem small, they can really add up. Make sure to record your expenses as you go along. Keeping detailed records of any expenses related to your rental makes things much easier when it comes time to file your taxes — as well as in case the IRS has questions down the line. Knowing what you can deduct and keeping good track of those expenses can help you take maximum advantage of tax savings on your rental property.

Want to make the most out of your vacation rental business? Be sure to check out The vacation rental property owner’s guidebook.

Although we hope you’ll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.