Owning a short-term rental property, such as one listed on platforms like Airbnb or Vrbo, can be a lucrative business venture. In addition to earning rental income, property owners may be eligible for various tax benefits that can reduce their overall tax burden. However, understanding the specific tax rules that apply to short-term rental properties is crucial to making the most of these potential advantages.
In this blog, we’ll explore the tax benefits of owning a short-term rental property, how to maximize your deductions, and how partnering with a property management company like Brownstone Vacations can help you manage your tax responsibilities.
1. Deducting Property-Related Expenses
As a short-term rental property owner, you can deduct a wide range of expenses related to the maintenance and operation of the property. These deductions can significantly reduce your taxable income, making owning a vacation rental more profitable. Some common property-related expenses include:
Mortgage Interest: If you have a mortgage on the property, you can deduct the interest paid on the loan. This is a significant deduction, especially in the early years of the mortgage when interest payments are higher.
Property Taxes: Property taxes paid on the rental property are deductible as a business expense.
Depreciation: You can depreciate the cost of the property over a 27.5-year period (for residential properties). Depreciation allows you to deduct a portion of the property’s value each year, even though the property may be appreciating in value.
Repairs and Maintenance: Any repairs or maintenance costs necessary to keep the property in good condition are deductible. This includes costs for fixing appliances, painting, or replacing worn-out furniture.
Utilities: Utilities like water, electricity, gas, and internet used by guests are deductible as operating expenses.
Insurance: The cost of property insurance for your short-term rental is fully deductible.
By properly tracking and reporting these expenses, you can reduce your taxable rental income, ultimately saving you money at tax time.
For more information on managing your short-term rental business and maximizing your deductions, check out Brownstone Vacations.
2. Deducting Costs for Furnishing and Supplies
Furnishing your short-term rental property with furniture, appliances, and other amenities is a key aspect of attracting guests. Fortunately, these costs can also be deducted as business expenses.
Furnishings and Appliances: The cost of purchasing furniture and appliances for the rental property can be deducted. If the cost is substantial, you may need to depreciate it over several years, but smaller items may be deductible in the year of purchase.
Linens, Towels, and Other Supplies: Any consumable supplies like linens, towels, toiletries, and cleaning supplies that you provide for your guests can also be deducted. These are considered part of the cost of operating your short-term rental business.
Properly documenting these purchases and keeping receipts will ensure that you can claim these deductions when filing your taxes.
3. Travel and Mileage Deductions
If you need to travel to your short-term rental property for maintenance, inspections, or guest-related issues, you can deduct the cost of your travel. Here’s how:
Mileage: If you drive to your rental property for business purposes, you can deduct the mileage. The IRS allows you to deduct a standard mileage rate for the miles you drive in your personal vehicle for business purposes (currently around 58 cents per mile for 2021).
Travel Expenses: If you fly or take other transportation to your rental property for business-related reasons, you can deduct travel costs like airfare, rental cars, and lodging. However, keep in mind that these expenses must be directly related to your rental business (not personal trips).
Tracking your travel expenses can help you take advantage of these deductions, so be sure to keep accurate records of all travel-related receipts and mileage.
4. Passive Income Tax Benefits
While operating a short-term rental property is often considered an active business, there are certain tax benefits associated with earning passive income from rental properties. If you qualify, rental income may be treated as passive income, which can allow for additional tax benefits.
Real Estate Professional Status: If you spend more than 750 hours per year on rental-related activities and more than half of your working hours are spent on real estate activities, you may qualify as a real estate professional. This status allows you to deduct rental losses against your regular income, which is not allowed for most other property owners.
Self-Employment Tax Exemption: Rental income from short-term rentals is not subject to self-employment tax unless you provide substantial services to your guests (such as cleaning, concierge, etc.). By keeping your rental business relatively hands-off and using a property management service, you can avoid self-employment tax.
5. Deducting Property Management and Professional Fees
If you hire a property management company to handle the day-to-day operations of your short-term rental property, the cost of these services is fully deductible. This includes:
Property Management Fees: If you work with a property management company like Brownstone Vacations, the fees they charge for managing your rental property—such as guest communication, maintenance coordination, and cleaning—are deductible as a business expense.
Professional Services: Fees for legal advice, accounting services, or tax preparation can also be deducted.
Partnering with a property management company can not only simplify the operations of your short-term rental but also increase your available tax deductions. Explore property management services with Brownstone Vacations.
6. Potential for Long-Term Capital Gains Tax Treatment
When you sell your short-term rental property, you may be eligible for favorable tax treatment if the property qualifies for long-term capital gains tax. This is applicable if you’ve owned the property for more than a year and sell it for a profit.
The long-term capital gains tax rate is typically lower than the ordinary income tax rate, which can save you money when you sell your property. However, there may be exceptions depending on how the property was used and whether you’ve claimed depreciation in the past.
It’s a good idea to consult with a tax professional to understand how selling your short-term rental property could affect your tax situation.
Conclusion
Owning a short-term rental property offers several tax benefits that can help you reduce your tax liability and maximize the profitability of your investment. From deducting property-related expenses like mortgage interest and utilities to taking advantage of tax exemptions for travel and professional services, there are many ways to benefit financially.
However, tax laws can be complex, and it's always a good idea to consult with a tax professional to ensure you're maximizing your deductions and staying compliant with IRS rules.
If you want to simplify the management of your vacation rental and ensure you’re taking full advantage of these tax benefits, partnering with a professional property management company like Brownstone Vacations can help. They handle everything from guest communication to cleaning and maintenance, so you can focus on growing your business and enjoying the financial rewards.
Learn more about property management services with Brownstone Vacations.