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Homeowner  •  June 08, 2024

The Ultimate Guide for Vacation Rental Taxes

Anna Ellison
Anna Ellison

With over six years of content marketing experience, Anna is a writer on the AvantStay team. Throughout her career, she’s given brands a voice and told stories across diverse industries including broadband, fintech, hospitality, mobile apps, and real estate.

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Just like that, tax season is here. This not-so-festive time of year can be stressful for short-term rental owners, but it doesn’t have to be. Preparation is key when it comes to filing your taxes. Our guide will make this often tedious process a breeze. We’ll cover unique vacation rental tax rules, deductions, and everything in between. 

The filing deadline to submit 2023 tax returns was last Tuesday, April 15, 2024. 

The 14-day rule

One of the most important vacation rental tax rules is the 14-day rule. According to the IRS, if a property is used as a home and you rent it out for less than 14 days in the tax year, you do not have to report income generated. On the other hand, if you rent your property for 14 days or more, you have to report your income and are subject to taxes. Luckily, you can deduct expenses that come from running your short-term rental, but more on that later. 

If you stayed at your vacation rental home for more than 14 days, or more than 10% of the total time rented, things get a little tricky. When reporting your expenses, you’ll have to categorize them by rental use and personal use. The IRS considers personal use as any time you or someone in your family occupies your vacation rental. It’s also considered personal use if you rent your home to anyone for “less than a fair rental price.” If you need to stay at your property to work on home maintenance projects, those stays don’t count toward your personal use days. Just be sure to document the time and reason for your stay. 

1031 Exchanges 

Short-term rental investors should leverage the tax benefits of a 1031 exchange. In short, a 1031 exchange is the act of “swapping” one investment property for another like-kind property. If you meet the requirements of 1031, you’re able to defer capital gains tax on the sale. Investors can use a 1031 exchange to purchase a vacation rental property, as long as the home is rented for more than 14 days in the tax year. The rules and requirements of 1031 exchanges can be complicated, so short-term rental investors should work with a tax professional before making any moves.

Short-term rental tax deductions 

If you rent your home out for more than 14 days, you’re able to deduct the expenses of running your short-term rental business from your income. Common short-term rental tax deductions include: 

  • Advertising
  • Auto and travel expenses
  • Cleaning and maintenance
  • Commissions
  • Depreciation
  • Insurance
  • Legal and other professional fees
  • Local transportation expenses
  • Management fees
  • Mortgage interest paid to banks, etc.
  • Rental payments
  • Repairs
  • Taxes
  • Utilities

One thing to keep in mind is the difference between repairs and improvements. Most repair costs can be considered tax write-offs, while home improvement costs can be a little more complicated. A repair is when you fix something that is damaged or broken, while an improvement adds value to your vacation rental. Examples of improvements include room additions, installing a pool, upgrading your appliances, and more. Divvy up these expenses and keep detailed, accurate records and receipts. 

We also suggest using IRS Publication 527 as your go-to resource for all vacation rental tax questions and consider working with a tax professional to help with the nuances of these deductions. 

Schedule C vs. Schedule E 

When filing your vacation rental taxes, you’ll have to choose the right 1040 form. The two main options for short-term rentals are Schedule C and Schedule E. With Schedule C, you’re subject to a self-employment tax which is used to fund Medicare and Social Security. With Schedule E, your rental income is considered passive and you’re not subject to the self-employment tax. 

For both forms, you’ll need to provide documented expenses, 1099s for contractor payments, property usage schedule, and gross rental income. Here’s how to determine which form you should file: 

Schedule C

Use the Schedule C form if managing your short-term rental is your primary business and you provide guests with substantial services during their stay. Examples of substantial services include: 

  • Housekeeping (during the stay) 
  • Linen replacements
  • Concierge service
  • Meals 
  • Transportation 
  • Tours and activities

Substantial services don’t include the cleaning of public areas, paying utilities, repairs and maintenance, providing WiFi, etc. 

Schedule E 

Use the Schedule E form if your short-term rental is a way to generate additional income and you don’t provide substantial services or enough involvement for the IRS to consider you a self-employed vacation rental manager. 

Local laws for vacation rental taxes 

Vacation rental tax laws vary by state and local governments. Some jurisdictions require hosts to collect occupancy taxes directly from guests. These taxes are also known as lodging, hotel, or transient taxes depending on the location. Several online travel agencies (OTAs), like Airbnb, collect occupancy taxes on behalf of vacation rental hosts, but this also varies by location. In most cases, you will be responsible for collecting and remitting any taxes. For this reason, it’s essential that you understand your local vacation rental tax laws and payment schedules. 

Partner with an expert

Ditch the operational headache of running a short-term rental on your own (and avoid self-employment taxes) by hiring a vacation rental management company. When you partner with AvantStay, you get access to our Policy & Compliance team which ensures your home is compliant and operating within all regulations governed by HOAs and other local authorities. We collect all required taxes from guests directly and report and remit taxes on your behalf in compliance with local regulations. We also provide a detailed year-end statement that includes all expenses categorized according to Schedule E. Another perk? Your management fee could be tax deductible! 

Interested in learning more about AvantStay’s management services? Our team is ready to help. Get started with our vacation rental management experts today!

Anna Ellison
Anna Ellison

With over six years of content marketing experience, Anna is a writer on the AvantStay team. Throughout her career, she’s given brands a voice and told stories across diverse industries including broadband, fintech, hospitality, mobile apps, and real estate.

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