Owning a successful vacation rental comes with numerous benefits, including passive income, asset appreciation, and free vacations. But one advantage that's often overlooked is the tax benefits. If your vacation rental is rented out for more than 14 days a year, you may be eligible for various tax deductions. Here are some of the most significant ones:
Business Expenses: All expenses incurred for running your vacation rental are tax deductible, including cleaning costs, maintenance, repairs, insurance, supplies, software, transportation expenses, accounting and legal fees, property management fees, advertising, marketing, furnishings, and utilities.
Depreciation: The cost of a rental property, excluding the land, can be deducted over its useful life, which is usually 27.5 years for a residential income-producing property or 39 years for properties with four or more units. This translates to an annual deduction of 3.636% of the property's initial value.
Pass-Through Business Deduction: If you own your vacation rental through a "pass-through" entity like a sole-proprietorship or limited liability company, you may be eligible for a 20% personal deduction of your net rental income under the Tax Cuts and Jobs Act of 2018.
Property Taxes: While the personal deduction for property tax is capped at $10,000, vacation rental owners can deduct the entire amount as a business deduction.
Insurance: All insurance policies covering your vacation rental, including private mortgage insurance (PMI), are tax deductible, but only the PMI for the current year if payments were made in advance.
Major Improvements: Vacation rental landlords can write off up to $1,050,000 in personal property used for business under section 179 of the tax code, provided the property is rented more than 50% of the year. This covers expenses such as roofs, heating/cooling systems, and security systems.
Work-cations: If you visit your vacation rental for business reasons, you can deduct the expenses incurred during your stay, including travel costs, as long as the trip is strictly for business and not personal use.
Bonus Depreciation: The bonus depreciation tax incentive allows vacation rental owners to deduct a large percentage of their investment's asset cost within the first year of use, including the property (excluding land value), repairs, improvements, appliances, furnishings, and closing costs.
QBI Deduction: Hands-on vacation rental owners may be eligible for the QBI deduction, which allows a write-off of 20% of the rental's total earned income if the property owner spends a minimum of 250 hours maintaining the asset.
Vacancy: If a rental property is vacant, the costs to maintain and preserve it are deductible, and this may also apply to vacation rental owners in the case of external factors like hurricanes.
If you own a second home or a personal vacation property that you rent out occasionally, you may be eligible for a mortgage interest and property tax deduction. The property and local tax deduction is capped at $10,000 until 2025, and the mortgage interest can be written off if the debt does not exceed $750,000, with a possible increase to $1,000,000 in certain cases.
Consult with your CPA to determine what options may be available to you. If your second home is not used for personal use each year, it may be classified as an investment or rental property. The IRS allows you to rent the property tax-free for up to 14 days, but no rental-related expenses can be deducted. Any additional rental income generated after the 14 days must be reported and taxed.