Vacation Rental Taxes and Your Responsibilities

Owning a vacation rental property introduces a unique set of tax responsibilities. The income generated is accompanied by specific Internal Revenue Service (IRS) rules that must be followed. This involves correctly classifying your property, identifying all taxable income, claiming appropriate deductions, and filing the correct forms with federal and, where applicable, state and local tax authorities.

Determining Your Rental’s Tax Status

The first step is to determine how the IRS classifies your property based on rental versus personal use days, which dictates how you report income and deduct expenses. Under the “14-day rule,” if you rent your property for 14 or fewer days annually, you do not report the income or deduct any rental expenses.

If you rent for 15 or more days, its classification depends on your personal use. The property is a “personal residence” if your personal use exceeds the greater of 14 days or 10% of the total days it was rented at a fair market price; otherwise, it is a “rental property.”

A “personal use day” is any day used by you, a family member, or anyone paying less than fair rental price. A “rental day” is any day the property is rented at a fair market rate. Days for maintenance do not count as personal use.

Identifying and Calculating Taxable Income

Your taxable income begins with your gross rental income. This figure includes the rent you charge plus any additional fees paid by your guests, such as for cleaning, pets, or other services provided during their stay.

Many property owners must also collect and remit state and local taxes, such as sales, lodging, or occupancy tax. These taxes are not part of your personal taxable income because you are acting as a collection agent for the government. The funds are passed directly to the appropriate tax authorities and are not included in the gross rental income you report to the IRS.

Owners who use platforms like Airbnb or VRBO will likely receive a Form 1099-K reporting the gross transaction amount processed by the platform. You must report the gross amount from the 1099-K on your tax return and then deduct any applicable platform fees and other expenses separately, as this figure may include amounts that are not part of your final taxable income.

Allowable Deductions and Expenses

You can reduce your taxable amount by deducting the ordinary and necessary expenses associated with operating your vacation rental. Direct expenses are costs that apply 100% to the rental activity, such as booking fees, advertising, and supplies for guest use. These are fully deductible without allocation.

Indirect expenses are costs that benefit both the rental and personal use of the property, such as mortgage interest, property taxes, and insurance. These must be allocated between rental and personal use based on the ratio of rental days to the total days of use. For example, if your property was rented for 90 days and used personally for 30 days, 75% of your indirect expenses would be deductible.

Common deductible expenses for a vacation rental include:

• The allocated portion of mortgage interest and property taxes
• Property insurance
• Utilities like electricity and gas
• Repairs and maintenance costs
• Fees paid to property managers
• Cleaning and laundry services
• Supplies like toiletries and linens
• Professional fees for accountants or lawyers related to the rental activity

A significant non-cash deduction is depreciation, which allows you to recover the cost of the property and its furnishings over their useful lives. The IRS allows you to depreciate the value of the building (but not the land) over 27.5 years for a residential rental property. You must claim depreciation, as failing to do so does not prevent the IRS from adjusting your property’s cost basis as if you had, which can have consequences when you sell.

Required Tax Forms and Reporting

For most vacation rental owners, income and expenses are reported on Schedule E (Form 1040), Supplemental Income and Loss. This form is used for reporting income from rental real estate, where you will list your total income, categorize your expenses, and calculate the net profit or loss.

In certain situations, your rental activity is considered a business, which requires you to file Schedule C (Form 1040), Profit or Loss from Business. This applies if you provide substantial services to guests, similar to a hotel, such as regular cleaning, meals, or concierge services. Income reported on Schedule C is subject to self-employment taxes, whereas Schedule E income is not.

The net income or loss calculated on your Schedule E or Schedule C flows through to your main tax return, Form 1040, where it is combined with your other income. Depending on your overall income level, your rental profits may be subject to the Net Investment Income Tax (NIIT). The NIIT is a 3.8% tax on the lesser of your net investment income or the amount your modified adjusted gross income exceeds certain thresholds ($200,000 for single filers and $250,000 for married filing jointly). Conversely, if your rental activity qualifies as a trade or business, you may be eligible for the Qualified Business Income (QBI) Deduction, which could allow you to deduct up to 20% of your net rental income.

Making Tax Payments and Record-Keeping

Because rental income is not subject to automatic tax withholding, you are responsible for paying taxes on your profits throughout the year. If you anticipate owing $1,000 or more in tax from your rental activity, you are required to make quarterly estimated tax payments to the IRS. These payments are due on April 15, June 15, September 15, and January 15 of the following year.

Meticulous record-keeping is necessary to meet your tax obligations and substantiate your deductions in the event of an IRS inquiry. Your organized records should include:

• A detailed log of all income received, supported by bank statements.
• All receipts and invoices for expenses, categorized by type.
• A log tracking the usage of your property, distinguishing between rental days, personal use days, and vacant days.

Keeping these records digitally using accounting software or spreadsheets can simplify the process at tax time.