If you’re a real estate investor, landlord, or property manager, you know that vacation or short-term rentals (STRs) can be a great way to generate extra income. However, before you start renting out your property, it’s important to understand the associated expenses.
In this blog post, we’ll take a look at common expenses, how to report them at the end of the year, and tips on accurately tracking expenses.
Key takeaways
- Common vacation rental expenses include advertising and marketing, repairs and maintenance, professional fees such as leasing and property management, and depreciation.
- Options for keeping track of rental expenses include a spreadsheet and software specifically designed for real estate investors.
- Rental expenses are reported to the Internal Revenue Service (IRS) at the end of each year using Schedule E or Schedule C.
Common vacation rental expense deductions
Anyone who has rented out their property for vacation or short-term purposes knows that there are a number of expenses that come along with it. From advertising to repairs, these costs can quickly add up.
However, many people don’t realize that a number of these expenses are tax deductible. Here are common rental property tax deductions:
- Advertising. Any costs incurred in advertising your property, such as listing fees or the cost of creating promotional materials, can be deducted.
- Repairs and maintenance. Any repairs or maintenance expenses necessary to keep your property in good condition can be deducted. This includes both routine upkeep and major repairs.
- Interest expense. Rental tax deductions also include mortgage interest expense and credit card loan interest.
- Property tax. Rental owners can deduct the entire amount of annual property taxes paid, provided that the property qualifies as a rental business.
- Lodging tax. In many jurisdictions, vacation or STR owners are responsible for collecting lodging tax (sometimes called rental or sales tax) from guests and remitting the tax to the proper city and state tax departments. When tax is included as part of the rental income collected, it should also be expensed when the tax is paid.
- Insurance. The cost of insurance for your rental property is also tax deductible. This includes both liability insurance and any insurance required by your lender.
- Cleaning and linens. The cost of cleaning between guests and replacing linens is also tax deductible. This can include both the cost of hiring a professional cleaning service and the cost of purchasing new linens.
- Utilities. The costs of providing utilities, such as electricity, water, sewer, trash, internet, and cable, are typically paid for by the owner of a rental and are also tax-deductible expenses.
- Professional service fees. Property management fees, leasing fees, and accounting and legal fees are also deductible.
- Travel expenses. Costs incurred for traveling to and from a rental property, including auto expenses and fuel, airfare, and reasonable costs for lodging and meals.
- Depreciation. Residential rental property, including vacation or STR property, is depreciated over 27.5 years, using the annual depreciation expense to reduce taxable net income.
- Bonus depreciation. The entire cost of items used in a rental property, such as appliances, furniture, and electronics, can be fully deducted in the same year they are placed in service.
By taking advantage of these deductions, you may be able to significantly reduce the amount of tax you owe on your rental income.
Where and how to report rental expenses at the end of the year
The IRS provides 2 options for reporting expenses on a tax return for rental property.
Owners can report their expenses using Schedule E, which is designed for income-producing property, or Schedule C, which is designed for business expenses. Both forms have pros and cons, so it’s essential to weigh all factors before deciding.
Schedule E
IRS Form Schedule E is used to report income or loss from rental property, property rented for the long term, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs). The form is available on the IRS website.
Schedule E is divided into 3 parts. Part I is used to report income or loss from rental property. Part II is used to report income or loss from partnerships, S corporations, estates, trusts, and REMICs. Part III is used to report other income or losses, such as royalties. This part of the form includes a section for reporting capital gains or losses. It also has a section for reporting gain from the sale of a business property.
The form includes line-by-line instructions for completing each part. Schedule E must be attached to your tax return if you have income or losses from any of the sources listed above.
Schedule C
IRS Form Schedule C is a tax form used by sole proprietorships and single-member limited liability companies (LLCs) to report business income and expenses. The form is used to calculate the net profit or loss from a rental property, which is then used to determine the taxes owed.
Schedule C can be found on the IRS website, and it must be filed with the individual’s personal tax return. The form includes instructions on filling it out and where to report business income and expenses.
Regardless of which form is used, it’s important to keep accurate records of all expenses in order to comply with the rules and regulations of the IRS. In addition, accurately keeping track of vacation rental expenses and income throughout the year can make filing taxes easier.
How to keep track of rental property expenses
As a rental property owner, it is crucial to keep track of your income and expenses. This will help you stay organized and efficient, and it will also give you the information you need to prepare your taxes.
Many rental property owners use a separate bank account for rental income and expenses. This allows you to easily track how much money is coming in and going out.
A Stessa checking account is an excellent choice to consider when setting up a bank account for rental property. It’s money management custom-built for investors to reliably and automatically track income and expenses with unlimited free business or sole proprietorship accounts. In addition, a dedicated account can be created for free for each rental property or portfolio and set up in a matter of minutes.
There are 3 main options to choose from when it comes to keeping track of rental expenses.
- Use a free software program specifically designed for rental property owners. These programs can be extremely helpful, as they often offer a variety of features, such as the ability to automatically track rental expenses and income and generate reports and tax documents.
For example, Stessa, a Roofstock company, makes it simple to track rental expenses and income, leases and tenant information, and all other important documents associated with a rental property. Rental property investments are monitored from a single, comprehensive online dashboard to help investors optimize performance and rental returns. - Use a spreadsheet or other accounting software. This method is often more affordable than using a dedicated rental property program, but it can be time-consuming to set up and maintain.
- Keep paper records of income and expenses. This can be an effective method, but it is important to make sure that you keep all of your documents in one place so they are easy to find.
Whichever method you choose, keep accurate records of your income and expenses to prepare your taxes and maintain compliance with the IRS.
Final thoughts
Owning a rental property can be a lucrative investment, but it’s essential to stay on top of the associated expenses and income. By understanding and following the IRS guidelines and keeping track of your income and expenses, you can minimize your taxable net income from the property and keep more money in your pocket.
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