Vacation home ownership can be a joy. You can create lasting memories with family and friends, and you can turn your home into an income-generating investment when you offer it as a vacation rental. But for many second home owners, figuring out short-term rental taxes can be an overwhelming and frustrating task.
Whether you manage your taxes yourself or you want to outsource them to your property management team, here’s a list of tips and resources to help you prepare for tax season.
Navigating IRS forms and schedules can be especially confusing for vacation rental owners. For most short-term rental taxes, you’ll use either IRS Schedule E or C.
Form type |
Schedule E (Form 1040) |
Schedule C (Form 1040) |
|---|---|---|
Use if |
You rent out your property to earn supplemental income, but you don’t put enough work into it for the IRS to consider you a self-employed rental property manager. |
You provide “substantial” services for your guests’ convenience during their stay (i.e., regular cleaning, linen service, or housekeeping). |
Don't use if |
You manage the property as your primary business activity, or you provide "substantial" services for your guests’ convenience during their stay (i.e., regular cleaning, linen service, or housekeeping). |
You rent out your property to earn supplemental income, but you don’t put enough work into it for the IRS to consider you a self-employed rental property manager. |
What you'll need |
Documented expenses All 1099s filed reporting contractor payments Property usage schedule Gross rental income |
Documented expenses All 1099s filed reporting contractor payments Property usage schedule Gross rental income |
Your short-term rentals could be subject to self-employment taxes if you are providing substantial services to your tenants. Vacasa handles everything for you, from the day-to-day burdens of maintaining your property to saving you time and potential self-employment taxes.
One day can make the difference between paying hefty taxes and paying nothing at all. How much you owe—and how much you’re able to write off—will depend on how you use your property.
In simplest terms, the 14-day rental rule means you don’t pay taxes on the income you receive from your short-term rental if BOTH of the following are true:
However, if you rent the property out for more than 14 days and use it yourself for less than 14 days, taxes can become a bit more complex.
Luckily, we've got a whole guide to the 14-day rule—one of the most important vacation rental tax rules you should know about. Read the full article >
Vacasa keeps track of your owner stays throughout the year—so you don’t have to.
If you rent out your second home for more than 14 days, you may be eligible to write off some—or all—of your rental expenses. Your taxes may be simpler if you start treating your property as a business, rather than a second home. Need more details on what you can potentially write off? Read our list of 10 deductible expenses >
You should also familiarize yourself with the vacation home tax deductions for your state, and keep detailed records. You’re required, by law, to keep a receipt for every item you deduct. Come tax time, you don’t want to search through shoe boxes or comb your credit card statements, so it’s always best to keep digital records if possible.
As an owner of a short-term rental property, you should also consider holding on to your tax records for seven years. Be sure to maintain a record of the initial purchase price, capital improvements, and the depreciation deductions from the date of the initial purchase of the property and up to six years after you sell the home.
The IRS will also want to see a log that accounts for every day the home is used. Carefully document vacation rental days, personal use days, and days used for repairs and maintenance, which cannot be combined with days friends and family are using the home.
It’s also important to know that donated stays are deemed as personal use days, so they are not eligible for deduction nor can you receive a tax deduction for the value of the stay. However, if you rent your vacation home at market rate and donate the generated income to charity, you can deduct the business expenses and the charitable deduction.
How you use your home dictates the percentage of total expenses you can write off, and it impacts whether or not you have to pay income tax. Be diligent about how you balance and record personal and vacation rental days.
At Vacasa, we do this work for you, preparing a full report on rental days versus personal days, cost of supplies, and income generated.
To correctly prepare your short-term rental taxes, you must understand what is and what is not eligible for deduction when it comes to home repairs. Believe it or not, it’s not always clear, since all the work you do on your home is not weighed equally.
While depreciation deductions can be intimidating and typically result in a tax loss on paper for vacation rental properties—even on properties that are generating income—they do lead to tax-free income. Don’t overlook them as you’re preparing your returns.
According to the IRS, improvement expenses contribute to the restoration, adaptation, or betterment of your short-term rental property and are deducted over their useful lifetime rather than written off in full in the year of the expense.
If you’re adding an extra room, installing a water feature, or improving the quality of the property with a new security system, you’re making improvements. Contrast those improvements with fixing a broken staircase or replacing a broken window, which are considered repairs.
Improvements |
Repairs |
|---|---|
Building additions, such as a new bedroom |
Repairing a roof |
Upgrading wiring |
Replacing a doorknob |
Adding central air conditioning |
Repairing existing appliances |
Replacing the water heater |
Unclogging a drain |
Upgrading flooring |
Replacing rotted floorboards |
Modernizing the kitchen |
Replacing cracked floor tiles |
Don’t want to waste your time (including personal days) fixing up your vacation rental? We handle all maintenance and repairs for owners, so you don’t have to.
Once you’ve prepared your federal taxes, it’s time to consider how to file your local and state taxes.
Vacation rental tax rules can vary by region, state, and city. Avoid surprises, and familiarize yourself with all applicable tax authorities, as well as local regulations.
Depending on the location of your short-term rental, the amount of income you earn can impact everything from taxation to licensing. If you’re not working with a property manager who can explain the rules and tax structure, be sure to reach out to the local chamber of commerce with your questions.
As a full-service vacation rental property manager, we don’t just clean and maintain your property—we also handle the paperwork and logistics for the state sales and hotel taxes, and give you the information you need for state income taxes on your rental.
Disclaimer: This publication is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual's legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, you are advised to consult with your own attorney, CPA, and/or other advisor regarding your specific situation. The information provided here is for your use and convenience only. We have taken reasonable precautions in the preparation of this material and believe that the information presented in this material is accurate as of the date it was written. However, we will assume no responsibility for any errors or omissions. We specifically disclaim any liability resulting from the use or application of the information contained in this publication.
You’ll most likely need either Schedule E or Schedule C. You should use Schedule E if your vacation rental property is primarily used for supplemental income rather than a primary business. You should use Schedule C if you provide significant enough services for your guests that you could be considered a self-employed property manager.
You should keep a log tracking every day your home is used as a vacation rental, as well as every day used for maintenance or personal use. It’s also a good idea to keep receipts for all of your rental-related purchases and expenses.
According to this rule, if a property is your residence and you use it as a vacation rental for 14 days out of the year or fewer, you do not have to pay taxes on the rental income or report that income to the IRS. Learn more here.
They can be, if you work with a full-service vacation rental management company that will handle it all for you. People know passive income as “earning money while you sleep.” That means no effort or work on your part. And, that’s what companies like Vacasa can offer homeowners like you. We’ll market your home consistently, assist your guests, maintain your home and coordinate any repairs, thoroughly clean and sanitize after every stay, and more. In the meantime, you kick back and follow your growing revenue on your owner dashboard.
You can write off some vacation home expenses to reduce your taxes. The general rule of thumb is that expenses must be:
Possible deductible vacation home expenses include cleaning fees, HOA fees, maintenance and repairs, utilities, and marketing services. Want to maximize your tax savings? Consider these 10 tax deductible vacation rental expenses.
The Schedule E IRS form is used to report your vacation rental’s supplemental income and loss. Note that this is used for “supplemental income” not “earned income.” Earned income from your vacation is generated actively, by offering “substantial services.” These include daily housekeeping, changing linens, conducting guest tours, or transportation.
In comparison, supplemental income is earned by providing “insubstantial services” to guests—water, gas, electricity, customary repairs and maintenance, and trash collection.
California licenses
Vacasa Seasonals Inc.
California DRE #02160171
Vacation Palm Springs Real Estate, Inc.
California DRE #01523013
Vacasa offers property management and other real estate services directly through Vacasa LLC and through Vacasa LLC's licensed subsidiaries. Click here for more information about Vacasa's licensed real estate brokerage/property manager in your state. Vacasa’s licensed real estate brokerages/property managers include: Vacasa Alabama LLC; Vacasa Arizona LLC; Vacasa of Arkansas LLC; Vacasa Colorado LLC (Micah Victory); Vacasa Delaware LLC, 302-541-8999; Vacasa Florida LLC; Vacasa Illinois LLC 481.014072, Micah Victory Managing Broker Lic# 471.021837; Vacasa Louisiana LLC, Dana MacCord, Principal Broker, ph 504.252.0155 (Licensed in LA); Vacasa Michigan LLC, 602-330-9934; Vacasa Missouri LLC, Vicki Lyn Brown, Designated Broker; Vacasa Nevada LLC; Vacasa New Hampshire LLC,45 NH-25, Meredith, NH 03253, Susan Scanlon, Broker of Record; Vacasa Minnesota, Broker: Micah Victory, license #40877637; Vacasa New Mexico LLC, 503-345-9399; Vacasa New York LLC, 888-433-0068, Susan Scanlon, Real Estate Broker; Vacasa North Carolina LLC; Vacasa Oregon LLC; Vacasa Pennsylvania LLC; Vacation Palm Springs Real Estate, Inc., California DRE #01523013, Mark Graham, California DRE #00700720; Vacasa Real Estate LLC (licensed in Texas, Debra Brock, Designated Broker); Vacasa Real Estate LLC (licensed in Washington, Robert Brush, Designated Broker); Vacasa Seasonals Inc., California DRE #02160171, Lisa Renee Stevens, California DRE #01485234; Vacasa South Carolina LLC; Vacasa South Dakota LLC; Vacasa Tennessee LLC; Vacasa Vacation Rentals of Hawaii LLC, 69-201 Waikoloa Beach Dr. Ste. #2F17, Waikoloa, HI 96738; Vacasa Vacation Rentals of Montana LLC, Terah M. Young, Licensed Property Manager; Vacasa Virginia LLC; Vacasa Wisconsin LLC; Vacasa Wyoming LLC. In Canada, this advertisement is provided by Vacasa Canada ULC, CPBC lic. number 75826, 172 Asher Rd. V1X 3H6 Kelowna, BC.
Research for this report was gathered from various online resources, such as:
*Survey methodology: Allison+Partners Research + Insights surveyed 1,006 U.S. respondents over the age of 18 who said they owned their primary residence, plus one or more additional residences, and who generated income from renting out one of their properties. The survey was fielded using the Qualtrics Insight Platform, and the panel was sourced from the Lucid exchange. Fielding was executed between Mar 4–Mar 11, 2019.
