8 Rental Tax Deductions You Should Use for Your Vacation Properties
Do you invest and own real estate rental properties in California? Being that we are in early August, which is a popular time of the summer for people to go on vacations with their family. Tom Wheelwright wrote an interesting article recently on Entrepreneur about “9 tax deductions you take for short term rental properties,” if you use platforms such as Airbnb, VRBO, Homeaway to list rentals then you should read on further. He points out how the Trump tax reform TCJA of 2017 included many new and useful deductions, and it treats vacation rentals as businesses. If you rent property and it is part of a business entity then here are several deductions you should be aware of.
The 14-day rule
If you purchased a vacation home that you use sometimes for yourself and you choose to list for or a short-term rental through services such as Airbnb, HomeAway, VRBO, FlipKey, need to know about the 14-Day Rule for rental property owners. According to IRS guidelines, Under this rule, you don’t pay tax on income you earn from the short-term rental, as long as you:
- You rent out the property for 14 days or less during the year;
- And you use the vacation house yourself for the greater of 14 days or 10 percent of the total days you rent it to others.
If you rent out your place for two weeks or less, keep careful track of both rental days and those days you used the residence yourself. If you rent for longer than the 14-day exception period, and you do not use the vacation property at all for yourself or family; then you must pay taxes on the rental income. So here are 8 tax saving tips if you have rental properties that are subject to income tax, that you should take advantage of.
The bonus depreciation deduction
The new bonus depreciation law that wrote about last year, now allows property owners to deduct a 100% of expenses for personal property and land improvements used for business. The rule before only allowed for 50% deduction for furniture and equipment. This tax rule change applies to new properties that are placed into service from the period of September 27, 2017, to December 31, 2022.
Section 179 for improvements
The new Section 179 Deduction now allows vacation property owners to deduct legally capital expenditures, which has expanded to include, roofs, HVAC units, fire alarms and security system devices for commercial properties. According to Tom Wheelwright “as long as the vacation rental is used by customers on average for seven days or less.”
The 20 percent QBI pass-thru income deduction Section 199a
Now I have a lot written a lot about the qualified business income section 199a and if you are a landlord who owns a property as a business entity (Sole Proprietorship, S-Corp, C-Corp) you may be able to take advantage of deducting 20 percent of your rental property net income as a result of the new TCJA tax law changes. This deduction is very complex so I suggest consulting an experienced CPA firm for more details. This deduction is scheduled to expire after 2025. For details, see Every Landlord’s Tax Deduction Guide, by Stephen Fishman (Nolo).
Rental property insurance deduction
If you own rental properties, you can deduct you insurance costs. Expenses related to fire and mortgage insurance fees for the year in which they were paid.
Rental property business expenses
You are entitled to deduct all “ordinary and necessary” expenses to operate your rental property business.Costs you incur to place the property in service, manage it and maintain it generally are deductible. Even if your rental property is temporarily vacant, the expenses are still deductible while the property is vacant and held out for rent.
Deductible expenses include, but are not limited to:
- Cleaning and maintenance
- Homeowner association dues and condo fees
- Insurance premiums
- Interest expense
- Local property taxes
- Management fees
- Pest control
- Professional fees
- Rental of equipment
- Rents you paid to others
- Trash removal fees
- Travel expenses
- Yard maintenance
Travel expense deductions for rental property management
You can deduct the cost of travel to your rental property if the primary purpose of the trip is to check on the property or perform repairs and tasks related to renting the property. If you mix business with pleasure, though, you’re required to allocate the travel costs between deductible business expenses and nondeductible personal costs. I wrote about an unusual case, called FRENCH v. COMMISSIONER that the tax court ruled in favor of allowing a couple to deduct private plane travel costs off their tax returns for visiting their rental property for management purposes. These travel deductions may include airfare, accommodations, meals, miles and other expenses, as long as they are considered reasonable. Remember that trips to the area will always be a deduction if you’re checking in with tenants or the property manager or working on the property.
Guest service fee deductions
People often search online when looking for a place to rent while on vacation or business travel. Airbnb, VRBO, FlipKey and other short-term rental marketplace platform companies usually charge a percentage fee, called a guest-service fee or a host-service fee that is taken off the top of the rent that guests pay. This guest service is tax-deductible. Tom Wheeler points out that Airbnb’s, fee is usually 0 percent to 20 percent of the cost of the rental. You can write off this fee on your tax returns for vacation rentals. You and the IRS will receive a 1099 Form from the rental company that will supply for your records the total fees collected.
Room rental deductions
If you rent out a room (compared to the entire house) for more than 14 days, you will pay tax on the rental income. Also you may deduct 100 percent of expenses such as property insurance, mortgage interest and property taxes based on a percentage of your business versus personal use. If you rent out a room in your property and it is less 14 days during a total year period, then the 14-day rule applies in the same way as if you rent out the whole property or house, and you do not to pay taxes on this income. Many people are starting to use Airbnb to rent out their properties on a short term basis.
Remember, If you rent for longer than the 14-day exception period, detail the dates precisely so you can properly divide out personal and business expenses, for tax purposes such as for deducting mortgage interest.
If you are real estate investor or you if you own rental property, I highly recommend working with a professional real estate CPA tax advisor. There are many new rules and deductions with the Trump tax reform TCJA to consider, and it’s important to consult with an expert to look at your overall financials.