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If you own a vacation or second home that you rent out on the short term rental market, come April 15th, you might be in better tax shape than you thought. Whether you own several vacation rentals or merely want to make some cash from your spare room, there are a number of tax benefits you may be overlooking.
If you rent out your home for 14 days or fewer per year, and you reside there more than 10 percent of the time it’s rented out, you’re off scot-free as your home is not considered a rental property. Note that state and local taxes may still apply, depending on where your rental is. Things get a bit trickier, however, when you rent your property out for longer periods of time, but there’s still some good news for your checkbook.
If you live in your house or apartment part-time (more than 15 days) and rent it out part-time (over 14 days), the taxes on your rental income will be less than if it were strictly a vacation rental as you’re able to deduct 100% of your direct rental expenses. These expenses, however, can’t exceed your earned rental income. Be sure to fill out and file a Schedule E form.
If you are taxed on your rental income, as most people are, you can make the most of your situation by claiming certain tax deductions. In addition to the obvious ones, such as the costs of operating and maintaining a rental, this can also extend to some personal expenses and the wear-and-tear of time on the building. In many cases, such tax deductions can cancel out part or even all of your rental income tax. Let’s explore this in more detail.
As mentioned, vacation rental owners are allowed to claim the basic costs of operating a rental as tax deductions. This includes things like insurance, cleaning, utilities and maintenance, as well as legal fees and mortgage insurance paid to banks. You can also write off expenses incurred if you’re personally managing the property, such as some auto and travel expenses, and if you manage your rental business from home, you can potentially even extend this to your home office. If you have a dedicated office solely for the purpose of managing your rental (for example, doing bills and meeting potential renters) you can claim a small portion of utilities as well as homeowner’s insurance as a business deduction. The same applies to the cost of professional management services, such as fees paid to Pillow. Pillow can take care of booking, cleaning and other hassles for you, and the expenses are still tax deductible.
Another perhaps less obvious deduction is depreciation. Depreciation is the fact that your building loses value over time due to age. For residential rentals, depreciation takes place over 27.5 years, whereas it would be 39 years for commercial properties. For example, for a house you paid $100,000 for (that’s the building only, not including the land), the annual depreciation would be $3,636.36. That means you can accept up to that much rental income per year without being taxed.
If you find this confusing, don’t worry – talk to a tax professional. Pillow encourages all hosts to check their local and state taxes and regulations, or consult a tax professional for advice on reporting your rental income.
In addition, this tax season, Airbnb has partnered with H&R Block to provide a $20 discount on in-person tax services and a 35% discount for online tax services. Visit here to learn more. For a more detailed resource, read this guide from Airbnb and Ernst & Young LLP (EY).
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