With tax season just around the corner, you may be wondering what you can do to minimize the burden. Thankfully, our friends at the IRS have been quite generous in drawing up their list of vacation rental tax deductions.

Hopefully you’ve kept meticulous expense records of your business, because the list of deductions is surprisingly long!

The IRS Wants to Know About Your ‘Dwelling Unit’

Before you get all excited and start tallying up your receipts, we need to make sure you qualify. You see, the Internal Revenue Service will need to verify that your dwelling unit is not being used as a residence.

If you personally occupy your property for

  • 14+ days of the year, or
  • 10% of the total number of days the property was rented to other guests in the year

then your dwelling unit is a residence and will not qualify for these tax deductions.

For those of you who’ve dedicated your property to vacation rentals, this isn’t even a concern. All you need to worry about then is that your property is occupied for more than 15 days of the year. You can read more about the details here.

Vacation Rental Tax Deductions for 2018

The IRS provides some tips on rental real estate tax preparation that make it clear the following things are tax deductible:

  • Mortgage interest
  • Property tax
  • Operating expenses
  • Depreciation
  • Repairs
  • Expenses for managing, conserving and maintaining your rental property. This includes regular maintenance and certain materials & supplies required to keep your property “in good operating condition”.

So, this is a pretty nice list. But sometimes it’s a little hard to discern exactly what they’re referencing. Here’s some examples of operating expenses you can deduct:

  • Utilities
  • Advertising & marketing (web design, promoted listings, etc)
  • Channel management fees – such as Tokeet 😉
  • Linens, towels, and basic amenities

Further Clarification

There’s a few more important details that the IRS has outlined for vacation owners.

  1. Firstly, if any of the expenses listed above were paid for by the tenant, they are still deductible!
  2. Your rental income is another deduction you can take advantage of:

    “When you include the fair market value of the property or services in your rental income, you can deduct that same amount as a rental expense.”

    Some people get confused over “fair market value”. The IRS is not asking for the value of the entire house in this instance, but the fair market rental (FMR). You can use this HUD tool to calculate the FMR of your house instantly.

  3. Finally, the tips page states that you may not deduct the cost of improvements. They go on to define an improvement:

    “A rental property is improved only if the amounts paid are for a betterment or restoration or adaptation to a new or different use.”

    That doesn’t mean that your improvements aren’t deductible at all – just that you can’t do it from your 1040. Instead, you’ll use Form 4562.