The Tax Benefits of Owning a Short-Term Rental in Your Portfolio

Jul 30

Owning a short-term rental property can be a lucrative investment, not only because of the potential for high rental income but also due to the numerous tax benefits that come with it. If you’re considering adding a short-term rental to your portfolio, understanding these tax advantages can help you maximize your return on investment. In this comprehensive guide, we will delve into the various tax benefits, how to qualify for them, and tips to make the most of your short-term rental property.

1. Depreciation Deductions

One of the most significant tax benefits of owning a short-term rental is the ability to depreciate the property. Depreciation allows you to deduct a portion of the property's cost over its useful life, which is typically 27.5 years for residential real estate.

How it works: The IRS allows you to deduct the depreciated value of the property each year, which can significantly reduce your taxable rental income. For example, if you purchased a property for $275,000, you could potentially deduct $10,000 each year for 27.5 years.
Bonus depreciation: Recent tax laws have introduced bonus depreciation, which allows you to deduct a larger portion of the property’s cost in the first year. This can be particularly beneficial for short-term rental owners looking to offset high initial expenses.

2. Mortgage Interest Deductions

Interest paid on the mortgage for your rental property is deductible, which can provide substantial tax savings.

Primary and secondary mortgages: Whether you have a primary mortgage or a secondary mortgage on the property, the interest payments can be deducted from your taxable rental income.
Points and loan origination fees: Points and fees paid to obtain a mortgage can also be deducted over the life of the loan, providing additional tax benefits.

3. Property Tax Deductions

Property taxes paid on your rental property are deductible, reducing your overall taxable income.

Local property taxes: Any state, local, or foreign property taxes you pay can be deducted from your rental income.
Ad valorem taxes: These taxes, based on the assessed value of the property, are also deductible and can be a significant tax-saving opportunity.

4. Operational Expense Deductions

The costs associated with operating and maintaining your short-term rental are deductible.

Maintenance and repairs: Regular maintenance and necessary repairs to keep the property in good condition can be deducted.
Utilities and services: Expenses such as electricity, water, gas, internet, and property management fees are deductible.
Cleaning and landscaping: The costs of cleaning services between guests and maintaining the property's landscaping are also deductible.

5. Travel Expense Deductions

If you travel to your rental property for management or maintenance purposes, you can deduct the associated travel expenses.

Transportation costs: Deductible expenses include airfare, car rentals, and mileage for driving to and from the property.
Lodging and meals: If your travel requires overnight stays, lodging and 50% of meal expenses can also be deducted.

6. Marketing and Advertising Deductions

Expenses related to marketing and advertising your short-term rental are fully deductible.

Online listings: Fees paid to platforms like Airbnb, VRBO, and other listing sites are deductible.
Marketing materials: Costs for creating and distributing brochures, business cards, and other promotional materials can be deducted.
Professional photography and videography: Investing in high-quality photos and videos to market your property can also be written off.

7. Professional Fees Deductions

Fees paid to professionals who help manage your rental property are deductible.

Property management fees: If you hire a property management company, their fees are fully deductible.
Legal and accounting fees: Expenses for legal services and accounting or tax preparation services related to your rental property are deductible.

8. Home Office Deduction

If you manage your short-term rental from a home office, you may qualify for the home office deduction.

Exclusive and regular use: The home office must be used exclusively and regularly for managing your rental property.
Calculation methods: You can use either the simplified method (a flat rate per square foot) or the regular method (actual expenses prorated based on the office’s square footage).

9. Section 199A Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act, rental property owners may qualify for the Section 199A deduction.

20% deduction: This allows you to deduct up to 20% of your qualified business income (QBI) from your rental property, reducing your overall taxable income.
Qualification criteria: To qualify, your rental activity must be considered a trade or business, which typically involves regular and continuous involvement in managing the property.

10. Passive Activity Loss Rules

Rental properties are generally considered passive activities, but there are exceptions that can allow you to deduct losses.

Real estate professional status: If you qualify as a real estate professional, you can deduct losses from your rental properties against other income.
Material participation: Even if you don’t qualify as a real estate professional, you can still deduct losses if you materially participate in the rental activity.

Maximizing Your Tax Benefits

To fully leverage the tax benefits of owning a short-term rental, consider the following tips:

Keep detailed records: Maintain thorough records of all income, expenses, and activities related to your rental property. This will make it easier to substantiate deductions and maximize your tax benefits.
Consult a tax professional: Tax laws can be complex and ever-changing. Working with a tax professional who specializes in real estate can help you navigate these rules and identify all available deductions.
Utilize tax software: There are many tax software options available that can help you track expenses and calculate deductions for your rental property.
Regularly review tax laws: Stay informed about changes in tax laws that could impact your rental property deductions and benefits.

Conclusion

Owning a short-term rental property offers numerous tax benefits that can significantly enhance your return on investment. From depreciation and mortgage interest deductions to operational expense write-offs and Section 199A deductions, these tax advantages can help you reduce your taxable income and keep more of your rental earnings. By understanding and leveraging these tax benefits, you can make your short-term rental property an even more profitable addition to your investment portfolio.

Remember to keep detailed records, consult with a tax professional, and stay informed about tax law changes to maximize the financial benefits of your short-term rental property.

Tanner Shehan