With the rising popularity of Airbnb and other short-term rental sites, more and more people are renting out their homes for extra cash. You can rent out a private room, an entire house, or even buy a second property as a vacation rental. What’s more, Airbnb is also a great way of investing in real estate – it’s actually the preferred rental strategy for many investors. However, if you want to become a successful Airbnb host in the vacation rental industry, it’s important to understand one thing: Your short-term rental property is a business. This means that there are tax responsibilities that come with renting out on Airbnb. But, it also means you’re eligible for Airbnb tax deductions!
That’s right, individuals who run short-term rental properties can deduct rental property expenses. Luckily, changes that were brought by the Tax Cuts and Jobs Act (TCJA) in 2018 are mostly good for Airbnb hosts as they include new short-term rental tax deductions. There are many tax benefits and deductions for you to be saving money on your Airbnb rental property in 2020.
If you own an Airbnb investment property, this guide is for you. Here’s all you need to know about Airbnb taxes in the US.
If you’re not already a host, then check out our helpful guide on how to become an Airbnb host in 2020.
Learning the Difference Between Income Taxes and Lodging Taxes
Before we jump into the list of tax deductions for Airbnb hosts, there are a few things you need to know first. You need to understand that these tax deductions are not related to lodging tax, but rather to federal income tax. The income tax is a tax paid to your government (the amount of which is dependent on how much income you generate). On the other hand, the lodging tax is actually a tax that is paid by your guests. This is based on the cost of a stay at your short-term rental property. As an Airbnb host, you’re not responsible for paying the lodging tax and therefore, cannot claim any kind of deductions on it. But, you are obligated to collect this tax and hand it over to the designated authorities.
Understanding The 14-Day Rule
The second thing to understand is the 14-day rule as it affects whether or not you can apply for Airbnb tax deductions. This IRS rule also applies if you rent out a room in your house. According to this rule, you don’t need to pay Airbnb taxes on the money you make on a short-term rental. However, to take advantage of this rule and not owe any taxes to the federal or state government, there are two requirements:
- You need to rent out the property for 14 days or less during the year
- You need to use the vacation house yourself for at least 14 days or 10% of the total days you rent it to others – whichever is higher.
So, if you rent out for less than 14 days per year and use the property yourself for 14 days or more during the year, you don’t need to pay taxes on your Airbnb rental income. But, it also means you can’t deduct your expenses as a host. So, to maximize your Airbnb tax deductions, your property must be classified as a full-time rental business. In other words, tax deductions will apply to you if your use doesn’t exceed 14 days and/or you don’t use the vacation rental at all.
If your Airbnb short-term rental is subject to income tax, here are the important rental property tax deductions to keep in mind for significant savings:
1) Airbnb Rental-Related Expenses
The first of many Airbnb investment property tax deductions that applies if you rent out your property for at least 14 days every year is related to your expenses. As an Airbnb investor, you are allowed to deduct your rental property expenses from your income. In other words, ordinary and necessary expenses that you need to operate your rental business are tax-deductible. For example, if you buy furniture or appliances for the vacation rental property, you get to write off all or part of the cost as a rental expense. In addition, when you rent out a part of the property, you are allowed to deduct a percentage of the total housing expenses like electricity, gas, HVAC system, and water.
However, there are strict limits on such deductions as IRS doesn’t allow Airbnb hosts to deduct personal expenses as rental expenses. For instance, phone costs are not included with your Airbnb tax deductions. This is the case even if you give your guests unlimited access to it. One of the tax tips, in this case, is to have a second line for your guests to use. This way, the entire cost can be claimed as a deduction along with all your other Airbnb expenses for taxes.
2) Pass-Through Tax Deduction
The Tax Cuts and Jobs Act created a new tax deduction for people who earn income from a rental property business that they own individually or through real estate LLCs, partnerships, and the like (also known as “pass-through” entities). This includes almost all short-term rental owners. Under this act, if your short-term rental qualifies as a business for tax purposes – as most do – you may be entitled to a deduction of up to 20% of your net rental income from your income taxes. Keep in mind that this is an extra deduction that you can include along with your other rental property deductions. So, you don’t need to spend additional money or buy a new property to qualify.
However, the amount you can deduct will depend on two things: your taxable income and how much money you make from your Airbnb rental. You can calculate how much money or profit you’ll make from Airbnb using the Airbnb Calculator. This tool uses Airbnb data taken directly from Airbnb API that reflects the performance of Airbnb rentals in your area over the last 12 months. Essentially, this tool runs an Airbnb investment analysis to accurately estimate how much money an Airbnb property can make before you buy it or rent it out! You can get access to this tool right here on Mashvisor.
3) Deduction for Major Renovations and Improvements
Section 179 of the Tax Cuts and Jobs Act now allows vacation property owners to legally deduct the cost of certain capital expenditures like roofs, HVACs, or fire and security systems. This applies to you as long as your property is rented out to guests for more than 50% of the time or if you personally use the property for less than 7 days during the year. So, if you’re an Airbnb real estate investor and your property is considered a rental business, these Airbnb tax deductions apply to you. Before changes in the tax code, the amount that you can deduct for personal property under Section 179 was $500,000. Now, the amount is raised to $1 million.
4) Deductions on Mortgage Interest
If you’re renting out your primary or secondary residence as a short-term rental in the US and you have mortgage payments, then you can deduct the cost of mortgage interest. The changes to the tax law, however, resulted in a reduction of such tax deductions. Before, you could claim a deduction on interest with a max of $1 million in new debt. Today, that amount has been lowered to $750,000. However, investors will be happy to know that a rental property business is not subject to these new limits. Thus, Airbnb investors are allowed to deduct mortgage interest. Moreover, interest payments on any credit cards or loans that are used to pay for business expenses can also be deducted.
5) Property Tax Deductions
Deductions on property taxes are other real estate taxes that you can deduct when owning an Airbnb investment property in 2020. While previously there was no limit on the amount that can be taken as a personal deduction for property taxes, the Tax Cuts and Jobs Act set a new limit of $10,000. But this is another limit that doesn’t apply to vacation homes that are considered real estate rental businesses. As a result, investors in the short-term rental market claim their property taxes in full as Airbnb tax deductions.
6) Insurance Deduction
Another cost that real estate investors can deduct is rental property insurance costs. These costs may include mortgage and fire insurance fees for the year in which they are paid. Private mortgage insurance (PMI) premiums are also tax-deductible for the year in which they are paid. But keep in mind that if you pre-pay PMI premiums for a couple of years, only the part of the payment for that tax year can be deducted.
7) Deduction on Marketplace Fees
Airbnb, HomeAway, and other short-term rental listing sites will charge a percentage fee called a “host service fee”. This fee is taken off the top of the rent that guests pay. Airbnb hosts, specifically, are subject to a 3% host service fee on every booking. Again, if you rent out your home for more than 14 days of the year, this fee becomes completely deductible. Meaning, you can (and should) deduct the entire amount paid from your reported rental income since 100% of the fee was directly related to the rental use of the property.
8) Travel Expenses
Other Airbnb tax deductions that apply to investors include expenses when traveling to the rental property. Any travel expenses racked up during a visit to your vacation home rental can be deducted. A few examples include a plane ticket, hotel stays, food, etc. Of course, this is only if you travel for business related to your Airbnb rental property including:
- Visting your investment property to oversee or conduct repairs or general maintenance
- Visiting any rental property business partners
- Any education that is business-related (like real estate classes, for instance)
9) Home Office
Finally, if you work out of a home office and manage your vacation rental business from there, then any expenses related to your home office may be tax-deductible.
The Bottom Line
Airbnb can be a rewarding and profitable experience not only for those who want to bring in extra income but for real estate investors as well. Tax benefits are just one reason why you might want to consider owning an Airbnb investment property in 2020. And there are so many different ones that may apply to your business. This is why one of the best tax tips for Airbnb hosts is to keep Airbnb tax documents and records of any and every vacation rental property expense. You’ll be thankful that you did when tax season rolls around. It will also reduce your tax liability in the case the IRS requests to see any information regarding your taxes and tax deductions.
Whether you own or plan to buy an Airbnb rental, make sure to use Mashvisor’s tool to get access to short-term rental data that’ll help you make smart decisions for a successful Airbnb business. To learn more about our product and services, click here.