We know that tax season can be a headache for vacation rental property owners, but it doesn’t have to be that way. Learning how to file taxes when owning a vacation rental can feel overwhelming, but the key to smooth sailing through tax season is preparation. If you’re prepared when April rolls around each year, you’ll be able to quickly and easily file your taxes with minimal stress (Trust us, it’s possible!).
We talked to Allan J. Rolnick at Tristate Tax Resolution to learn what rental homeowners need to know when preparing their tax returns each year. One of Allan’s top tips to remember every year? Start early! “Planning is everything because you are less likely to miss deductions that you are entitled to,” he says.
Here’s everything you need to know about filing taxes as a vacation rental property owner this year.
How many days did you rent your home during the year?
When it comes to vacation rentals and taxes, 14 is your magic number. If you rented out your property for less than 14 days throughout the year, you don’t have to pay tax on any income you earned from the rental according to the IRS (but you also don’t get to claim any rental-related deductions). If you rented your home for more than 14 days, that means the IRS classifies you as a landlord, and you’ll need to report any rental income you’ve earned when you file your taxes. However, this also makes you eligible to deduct expenses related to your vacation home.
If you stayed in the home at all yourself (more than 14 days per year or more than 10% of the time you rented it out), you will need to divvy up your expenses between how much time you rented out the home and how much time was for personal use. Personal use time can refer to a time that you or any member of your family stayed in the rental for personal reasons. The IRS also refers to “use by anyone who pays less than a fair rental price” as personal use too.
But just because you’re staying at the property, doesn’t mean it counts as personal use. If you needed to stay in your vacation rental for business purposes, like completing a bathroom repair or painting the walls, those days don’t count toward personal use days. If this happens, remember to document your reason for being at the property in case of a future audit.
Keep records of major improvements and repairs
Whenever you’re making any changes to your property, you need to understand the difference between making a repair or an improvement. For repairs, the IRS lets you deduct the cost on that year’s taxes, however, the cost of an improvement depreciates over time. To decide which one it is, think about the reasoning behind the work you completed. A repair is typically just fixing something in the home that is broken or damaged, like fixing a broken sink, patching up a hole in the wall, or replacing a broken window. An improvement is something that adds value to the home, like a total kitchen remodel or adding a swimming pool.
If you did any major renovations or repairs on your home in the past year, like a remodel or a roof replacement, make sure you hold on to those records. The IRS rules about depreciation and write-offs can be complicated depending on your situation. We recommend working with your tax professional to decide the best way to deal with big improvements based on your specific circumstances.
Are you self-employed?
If you provide certain services and amenities for your guests, the IRS might consider you “self-employed” in the rental business. This means you’ll need to pay self-employment taxes that cover Social Security and Medicare. The types of “extras” that might earn you that self-employed status includes services like providing breakfast, offering transportation, or cleaning the property while the guests are still staying there. If you think you might fall into this category, talk to your tax professional to see how it affects your filing this year.
Document your expenses
When it comes to deductions, you can deduct those expenses related to the upkeep and the business of renting out your home. This can be anything from supplies to utilities to housekeeping. In order to deduct these expenses, you need to keep flawless records. (We’re repeating this a lot for a reason. Keeping accurate, comprehensive records will save you a lot of stress when filing your taxes or if you ever get audited. It may be a pain now, but your future self will thank you.) These expenses should be paid with your credit card, not cash.
“Paying expenses in cash is a no-no,” says Rolnick. “The deductibility will be questioned.”
Some of the biggest expenses that homeowners forget about when it comes to taking deductions are HOA fees, legal fees, landlord insurance, homeowners insurance, and flood insurance. For these, it’s important to remember that even if you might have paid for many years of insurance now, you can only deduct the cost for the current tax year.
You can also deduct any travel expenses you may have incurred throughout the year that relate to maintaining and running your rental property, like meeting with people who help with your rental or traveling to do repairs and pick up supplies (keep your receipts!).
Reevaluate your record-keeping processes
If you’re doing your taxes this year and notice it’s more difficult than you want it to be, this is a great time to think about how you can improve your records for next year. By getting some good processes in place now, you can make tax time easier year after year.
We recommend choosing a block of time each day or week to do your bookkeeping and update records. Also, consider using one dedicated credit card for everything related to your vacation rental business. This way you know that all purchases on that card were a business expense and then you can categorize them appropriately. We mentioned above that you should be keeping every single receipt related to your rental. This next year, make it a goal to digitize your paper trails so nothing gets lost. Certain apps, like Hubdoc, allow you to take a picture of your receipts and then email them to yourself and your accountant.
Lean on your property manager
Depending on the property management company you choose to use, you might be able to get some help with your taxes. Our accounting team at TurnKey provides homeowners with ready-to-file documents and automatically collects taxes from each stay. We’ll also create the 1099s for any vendor who provides services for your property (like housekeepers or landscapers). We know that you might have a lot on your plate when it comes to tax season, so using your property manager as a resource can help take care of those small, tedious details you’d rather not worry about.
Another bonus of hiring a property manager? The fees paid to your manager are tax deductible as a cost of running your business!
Need more help?
If you’re still feeling overwhelmed about filing your taxes this year, get a dedicated tax professional or property manager to help you make sense of the process. You can also check out tips straight from the IRS here. No vacation rental property is the same. Each one has different expenses and circumstances, and filing taxes can be difficult to navigate depending on your specific situation. But don’t fret. There’s no shame in hiring someone to help you file your returns so you can spend more of your time focusing on being a successful property owner.
For more information about filing taxes as a rental homeowner, get our comprehensive tax guide here.
Want to learn more about how a property manager like TurnKey can help you with your taxes? Schedule a consultation here.