11 Short-Term Rental Tax Deductions You Should Maximize

Are you looking to make the most out of your short-term rental property? One way to maximize your returns is by taking advantage of the various tax deductions available to rental property owners. With Clearing’s Automated Bookkeeping, tracking these deductions, from property taxes to mortgage interest cleaning expenses to legal fees, becomes effortless.

In this blog, we'll cover a range of deductions to help you save money and optimize your rental property business.

What are short-term rental tax deductions?

Some specific expenses and costs may be eligible for tax deductions when owning and operating a short-term rental property. Simply put, tax deductions are expenses that rental property owners can subtract from their rental income, reducing the amount of taxable income and, in turn, their overall tax liability. 

These deductions, outlined in the tax code, provide valuable benefits and incentives for rental property owners, allowing them to offset rental income, save on taxes, and reinvest in their business. By understanding and leveraging these deductions, rental property owners can maximize their tax benefits and optimize their rental property business.

11 Short-Term Rental Deductions

Now, let's dive into 12 short-term rental deductions you should be aware of and take advantage of. From property taxes to repairs and maintenance, mortgage interest to cleaning expenses, each deduction offers an opportunity to lower your tax burden and increase your rental property profits.

1. Property taxes

One of the primary deductions for short-term rental property owners is property taxes. Like with your primary residence, property taxes on your rental property are generally tax-deductible. These taxes include real estate tax, which is paid to local government authorities based on the value of your property. Deducting property taxes can reduce your taxable income and lower your overall tax bill. It's essential to keep track of your property tax expenses, as they can be substantial and significantly impact your business's financial health.

2. Repairs and maintenance:

Repairs and maintenance are an inevitable part of owning a short-term rental property. Fortunately, these expenses can be deducted from your rental income, reducing your taxable income and lowering your tax liability. Here are some key points to remember regarding repairs and maintenance deductions:

• Regular maintenance expenses, such as repainting, fixing broken appliances, and general upkeep, can be deducted as business expenses.
• Repairs made to fix damage caused by renters, such as repairing walls or fixing damaged furniture, can also be deducted.
• Keep detailed records of all repairs and maintenance expenses, including receipts and invoices, to ensure accurate deductions on your tax return.
• Hiring a professional for repairs or maintenance can also be deducted as a business expense if the expenses are directly related to your rental property.
• By taking advantage of repairs and maintenance deductions, you can maintain the quality of your rental property and lower your tax liability, increasing your rental property profits.

3. Property improvement

In addition to repairs and maintenance, property improvements can also be tax-deductible for short-term rental property owners. Property improvements go beyond regular maintenance and involve substantial changes that enhance the value of your rental property. Here are some key tax deductions related to property improvement:

• Depreciation: Take advantage of tax deductions for the depreciation of your rental property. Depreciation allows you to deduct the cost of your rental property over time, providing tax benefits each year.
• Bonus depreciation: Under certain circumstances, you may be eligible for bonus depreciation, which allows you to deduct a higher percentage of the property's cost in the first year.
• Cost segregation study: A cost segregation study is a valuable tool for rental property owners, as it helps identify and classify components of your property that can be depreciated more quickly, resulting in larger tax deductions.
• By understanding property improvement deductions, rental property owners can optimize their tax benefits, lower their taxable income, and increase their rental property profits.

4. Mortgage interest

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As a short-term rental property owner, mortgage interest is another significant deduction that can help reduce your tax liability. If you have a mortgage on your rental property, the interest paid can be deducted, lowering your taxable income. Here are some key points to remember:

• Keep track of the mortgage interest payments made throughout the year, as these payments can provide substantial tax savings.
• If you have a mortgage on both your primary residence and your short-term rental property, you can only deduct the interest paid on the mortgage for the rental property.
• Consult with a certified public accountant or tax professional to ensure you maximize your mortgage interest deductions within the legal limits.
• By deducting mortgage interest, rental property owners can significantly reduce their tax liability, increasing their rental property profits.

5. Guest-service fees

If you use a platform or service to manage bookings and handle guest services for your short-term rental property, the fees associated with these services can be tax-deductible. These guest-service fees are typically a percentage of the rental income and can vary depending on the platform or service provider. Deducting these fees can lower your taxable income, reducing your overall tax liability. However, it's essential to keep accurate records and consult with a tax professional to ensure you follow the tax rules and regulations for your vacation rental business.

6. Insurance premiums

Insurance premiums, such as premiums for liability and homeowner's insurance, are another deduction available for short-term rental property owners. By insuring your rental property, you protect yourself from potential risks and create an opportunity for tax savings. Here are some key points to consider:

• Premiums for insurance policies directly related to your rental property, including liability and homeowner's insurance, can be deducted as a business expense.
• Keep detailed records of insurance premiums paid, as they can be substantial expenses that impact your taxable income.
• Consult with a tax professional or certified public accountant to ensure you maximize your insurance premium deductions and follow all applicable tax laws and regulations.
• By deducting insurance premiums, rental property owners can reduce their taxable income, ultimately increasing their rental property profits.

7. Cleaning and maintenance

Cleaning and maintenance expenses are vital for keeping your short-term rental property in top shape and attracting guests. These expenses can also be tax-deductible, further optimizing your rental property business. Here are some key points to consider when it comes to cleaning and maintenance deductions:

• Hiring a cleaning crew to maintain your rental property can be deducted as a rental expense.
• Cleaning supplies and equipment, such as vacuum cleaners, cleaning solutions, and laundry services, can also be tax-deductible.
• Repairs and maintenance related to cleaning, such as fixing damaged furniture or repairing appliances, can be deducted as business expenses.
• Keep accurate records of all cleaning and maintenance expenses, including receipts, invoices, and payroll records, to ensure accurate deductions on your tax return.
• Regularly schedule cleaning and maintenance services to keep your short-term rental property in excellent condition, attract more guests, and maximize your tax deductions.
• By taking advantage of cleaning and maintenance deductions, you can improve the quality of your short-term rental property and lower your tax liability, enhancing your rental property profits.

8. Advertising

Advertising your short-term rental property is critical for attracting potential guests and increasing the occupancy rate. The good news is that advertising expenses can be tax-deductible, providing an added benefit for rental property owners. Here are some key points regarding advertising deductions:

• Costs related to advertising your rental property, such as listing fees, subscriptions to rental websites, and marketing materials, can all be deducted as business expenses.
• Whether you use online platforms, social media, or traditional advertising methods, the expenses incurred can help lower your taxable income.
• Keep detailed records of advertising expenses, including receipts and invoices, to substantiate your deductions and minimize the audit risk.
• By leveraging advertising deductions, rental property owners can maximize their gross income, reduce their taxable income, and boost their rental property business.

9. Depreciation

Depreciation is an essential tax deduction for short-term rental property owners. It allows you to deduct the cost of your rental property over time, providing tax benefits year after year. Here are some key points regarding depreciation deductions:

• Depreciation deductions can help offset rental income, reduce taxable income, and lower your overall tax bill.
• Cost segregation studies can identify components of your property that can be depreciated more quickly, resulting in larger tax deductions.
• By accurately documenting your property basis and depreciation, you can maximize your depreciation deductions and optimize your tax benefits.
• By understanding depreciation deductions, rental property owners can significantly lower their tax liability, increasing their rental property profits.

10. Legal fees

As a rental property owner, you may incur legal expenses related to your short-term rental business, such as consultancy fees or the cost of legal advice. These legal fees can be tax-deductible, allowing you to lower your taxable income and reduce your tax liability. Here are some key points regarding legal fee deductions for rental property owners:

• Legal fees incurred for rental business purposes, such as drafting rental agreements, seeking tax advice, or resolving disputes, can be deducted as business expenses.
• Keep accurate records of all legal fees, including invoices and receipts, to substantiate your deductions and minimize the audit risk.
• Consulting with a tax professional or certified public accountant can provide insights and guidance on maximizing your legal fee deductions within the boundaries of tax rules and regulations.
• Using legal fee deductions, rental property owners can optimize their tax benefits, lower their taxable income, and increase their rental property profits.

11. Commissions and Fees

If you engage a rental management company to handle bookings, guest services, and other responsibilities, the commissions and fees paid to these services can be tax-deductible. Here are some key points regarding commissions and fee deductions:

• Commissions and fees paid to rental management services are legitimate tax deductions for rental properties owned by individuals or companies.
• By deducting these costs, rental property owners can minimize their tax burden, increase their rental property profits, and streamline their rental property business.
• Consult with a certified public accountant or tax professional to ensure you maximize your commissions and fee deductions within the limits of tax rules and regulations.
• By taking advantage of commissions and fee deductions, rental property owners can reduce their overall tax liability and increase their rental property profits.

How to Qualify for Short-Term Rental Tax Deductions

To qualify for tax deductions on short-term rentals, familiarize yourself with the criteria. 

Understand the eligibility requirements and ensure compliance with IRS guidelines. You must first identify and decide where your property falls based on the following categories:

Schedule C (1040): You will use Schedule C if your property is your primary source of income or is part of a vacation rental business or trade. Schedule C applies to hosts that offer additional services such as daily maid service or linen changes. The IRS views your rental as a hotel service if your property provides this.

Schedule E (1040): This form is for hosts whose short-term rentals are passive income, or “a side hustle,” and may not be their primary source of income or do not provide hotel-level service. 

Final Thoughts

Regarding short-term rental tax deductions, every penny counts. Maximizing these deductions can significantly lower your taxable income and save you big during tax season. From property taxes to cleaning fees, don’t miss out on any opportunity to claim what's rightfully yours. 

Remember, keeping detailed records and staying organized is key to qualifying for these deductions, especially using Clearing to make the process a breeze. So, whether you're a seasoned host or starting, be proactive in understanding and utilizing these tax benefits. 

Clearing is a Financial Technology Company, not a bank. Deposit Accounts are issued by Evolve Bank & Trust, Member FDIC.

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