Maximizing Your STR Tax Deductions
Owning a short-term rental (STR) can be highly profitable, but come tax time, the nuances of the IRS tax code for rental income can feel overwhelming. Fortunately, as a short-term rental owner, you’re likely eligible for multiple tax deductions that can significantly reduce your tax bill.
Here’s a guide to understanding some of the most common deductions, along with essential tax rules to keep in mind.
1. Classify Your Property Correctly
Before jumping into deductions, it’s critical to classify your property correctly. The IRS distinguishes between a "rental property" and a "personal residence," which affects the types of deductions you can claim.
Rental Property: If you rent out your property for more than 14 days in a year and do not use it for personal purposes for more than 10% of the days rented, it is classified as a rental property. This classification allows you to deduct most rental-related expenses.
Personal Residence: If you rent out your property for 14 days or fewer, you don’t have to report the rental income at all, but your deductions will be limited.
2. Common Deductions for Short-Term Rentals
Mortgage Interest and Property Taxes
Just like with a primary residence, you can deduct mortgage interest and property taxes. However, if you use the property personally, you’ll need to prorate these deductions based on the rental days vs. personal days.
Depreciation
One of the most valuable deductions for rental property owners, depreciation allows you to deduct a portion of the property’s value each year. Typically, residential rental properties depreciate over 27.5 years, which can result in substantial tax savings.
Repairs and Maintenance
Repairs, such as fixing a leaky faucet or repainting walls, are fully deductible.
Maintenance costs, including cleaning fees and landscaping, can also be deducted.
Utilities and Supplies
If you pay for utilities like electricity, water, and internet, these are deductible as well.
Additionally, you can deduct the cost of supplies you provide for guests, such as toiletries, kitchen items, and cleaning supplies.
Insurance Premiums
Deduct any insurance premiums you pay for your property, including specialized rental insurance that protects against guest-related risks.
TRAVEL EXPENSES
Costs incurred while traveling to manage or maintain the property may be deductible.
Management and Service Fees
If you use a property management company those fees are deductible.
Certain hosting fees for listing services on platforms like Airbnb or Vrbo can be deductible.
Any costs associated with cleaning or hiring third-party services to assist with turnover can also be deducted.
Advertising and Marketing
Expenses for promoting your rental, including website hosting, digital ads, and other marketing costs, are also deductible.
Legal and Professional Services
Costs for legal advice, accounting, or other professional services related to managing your rental are deductible as well.
3. Keeping Track of Expenses
Good record-keeping is crucial for maximizing deductions. Consider the following practices:
Separate Business and Personal Finances: Maintain a dedicated bank account for your rental property’s income and expenses. This separation simplifies tracking and reduces the chance of overlooking deductible expenses.
Save All Receipts: Keep receipts and invoices for all repairs, supplies, and services. Many expenses can add up, and receipts provide the documentation needed if the IRS requests verification.
Use Accounting Software: Digital tools like QuickBooks help track income and expenses, generate reports, and organize records efficiently come tax time.
4. Special Rules and Tax Laws to Consider
The 14-Day Exception
This rule is beneficial for part-time rental owners. If you rent your property for 14 days or less per year, you can keep the rental income tax-free. However, you can’t claim deductions on rental expenses for that period.
Vacation Home Rules
If you use your short-term rental for personal purposes more than 10% of the total rental days, it becomes a "vacation home." This classification limits your deductible expenses. Any expenses must be prorated based on the number of rental days versus personal use days.
Passive Activity Loss Rules
In most cases, rental activities are considered “passive,” meaning you can only deduct rental losses up to your rental income. There is an exception if you are considered a real estate professional, where you may be able to deduct losses against other income if you meet certain criteria.
Qualified Business Income (QBI) Deduction
If your short-term rental qualifies as a business rather than just a passive activity, you may be eligible for the 20% Qualified Business Income (QBI) deduction. This can be a substantial deduction, but the property must meet certain active management requirements to qualify.
Self-Employment Taxes on Short-Term Rentals
If you provide significant services to guests, such as meal services, the IRS may classify your rental income as self-employment income. This could mean you’ll pay self-employment taxes on that income. It’s essential to distinguish between providing "significant services" and simply renting out space, as this affects your tax obligations.
5. Planning for Tax Season
Hire a CPA: Tax laws can be complex, especially with deductions and classification nuances. A certified public accountant (CPA) who specializes in rental properties can help ensure compliance and maximize your deductions.
Quarterly Estimated Taxes: If your rental income is significant, consider making quarterly estimated tax payments to avoid underpayment penalties. This applies especially if you don’t have other taxes withheld, such as from a W-2 job.
Stay Updated on Tax Law Changes: Tax laws affecting short-term rentals change frequently. Staying informed or working with a knowledgeable tax professional can prevent surprises and help you take advantage of new opportunities.
Final Thoughts
Navigating tax rules for short-term rentals can feel complex, but maximizing your deductions is entirely within reach with the right approach. By maintaining clear records, understanding which expenses qualify, and staying informed about IRS rules, you can ensure that tax season becomes just another part of your business strategy rather than a source of stress.
Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute tax or legal advice. Every short-term rental situation is unique, and tax laws can vary based on your location and specific circumstances. We strongly recommend consulting a qualified tax professional or legal advisor who can provide guidance tailored to your individual needs. This blog should not be used as a substitute for professional advice, and we are not responsible for any actions taken based on this information.
