Even if you already have a healthy income stream from your short-term rental, there’s still room to improve your profitability by taking full advantage of relevant tax write-offs. Whether you’re new to rental property ownership or you’re an experienced landlord, keep reading for tips on maximizing your deductions during tax season.
Short-term rental owners consider depreciation to be a blessing or a curse, depending on the situation. On one hand, property depreciation can be a significant yearly tax benefit that you can start writing off in the first year you put your property up for rental.
Because land doesn’t typically depreciate, the type of property you own plays a big role in how much you can deduct.
“In a condo, you don’t have land so it’s all going to be depreciable,” says Bob Wheeler, CPA and author of The Money Nerve: Navigating the Emotions of Money. “But if you have a property with very valuable land and a house that isn’t worth much, you won’t see much depreciation,” he notes.
While owners are often happy to write off their property depreciation, they’re sometimes caught off guard when they have to depreciate certain purchases and improvements over a long period of time.
“If you have a business and you spend $5,000 on equipment, you can take an immediate write-off,” says Wheeler. But rental properties are different. If you buy a $5,000 washer and dryer for your vacation home you would have to depreciate that cost over 5 to 7 years, Wheeler points out. And if you added a room to the home, you’d depreciate that cost over 27.5 years.
What does this mean for tax season? You can’t always write off the entire cost of an improvement during the year you paid for it. Instead, you might have to spread out the deductions over several years or even decades.
The rules surrounding these types of write-offs are complicated and they change from time to time, so it’s best to consult with a tax professional to find out how a costly home improvement could affect your taxes.
Personal and Rental Items
Wheeler says rental property owners sometimes neglect to deduct items that they use for both personal and rental purposes. These may include small week-to-week expenses–like toilet paper, towels or soap–which can add up to a significant total expense over the course of a year.
Many owners understandably wonder if they can deduct these types of expenses, particularly if they haven’t been keeping a running tally of toilet paper roll usage. Wheeler notes that it’s not necessary to get quite so detailed with your record-keeping.
“If you’re staying at the property about 10% of the time and you’re renting it out about 90% of the time, you can create a reasonable estimate,” he says.
Fees and Insurance
Property owners also forget to deduct certain fees and insurance costs on their taxes, says Wheeler. It helps to be exhaustive when you’re keeping track of these expenses, which can include HOA fees, legal fees, landlord insurance, homeowners insurance flood insurance and more.
Just remember that even if you pay for several years of insurance in advance, you can only deduct the cost for the applicable tax year.
It’s common to focus in on larger tax deductions and overlook the dozens of small expenses that are part of doing business as a rental property owner. These may include the cost of advertising, travel, lawn services, cable, internet, utilities, laundering, and pool services.
If you’re not sure which of your expenses are deductible, your best bet is to save all your receipts throughout the year and have a tax professional walk you through exactly what can be written off.
As you plan for the year’s deductions, keep in mind that you can’t deduct expenses that exceed the amount of your rental income.
“For example,” says Wheeler, “if you collect $10,000 in rental income for the year, but you have $12,000 in expenses, you can only write off $10,000.”
While this may not be a point of concern for someone who rents out their property nearly full-time, property owners who have more limited income should keep an eye on the total cost of their expenses and improvements over the tax year.
And remember that write-offs aren’t the only way to get significant tax benefits. The 14-day rule offers substantial savings for owners who rent their homes out more infrequently.
“You can rent your home for up to 14 days and keep the money tax free,” says Ron Shelton, broker and partner at Breckenridge Associates Real Estate. Shelton also advises rental property buyers to participate in a 1031 tax deferred exchange or use smart estate planning to avoid major tax implications for their homes.
Every rental property owner’s situation is slightly different, so your best bet is to educate yourself and stay up to date on write-offs and other sources of tax savings. Wheeler recommends taking the time to research rental property tax considerations online or, better yet, meeting with a tax advisor who can assess your situation and help you make your rental property as profitable as possible.