What Vacation Rental Expenses Are Deductible?

Owning a vacation rental property involves specific tax considerations that differ from those for a primary residence. The income generated from renting a second home, cabin, or condominium is subject to taxation, but owners can offset this income by deducting certain expenses. Navigating these rules requires a clear understanding of how the property’s use is categorized and meticulous tracking of all associated costs.

Categorizing Your Property’s Use for Tax Purposes

The ability to deduct expenses from your vacation rental hinges on how the Internal Revenue Service (IRS) classifies the property’s use. This classification is determined by the number of days the property is rented out versus the number of days it is used for personal purposes. A “rental day” is a day the property is rented at a fair market price, while a “personal use day” is any day it is used by you, a family member, or any other individual for less than fair market rent. However, days you spend working full-time to repair and maintain your property do not count as personal use days.

A primary threshold for classification is the “14-day rule.” If you rent your property for 14 days or fewer during the year, you are not required to report the rental income. Consequently, you cannot deduct any expenses associated with the rental. This can be advantageous for those who rent their property for a short, high-demand period, such as during a major local event.

When the property is rented for 15 days or more, the tax treatment depends on the extent of your personal use. If your personal use exceeds the greater of either 14 days or 10% of the total days the property is rented at fair value, the IRS considers it a “mixed-use” property. In this scenario, your deductible rental expenses are limited to the amount of rental income you receive, and you cannot claim a net loss. If your personal use does not exceed these limits, the property is treated more like a business, which may allow for the deduction of losses against other income.

Identifying Deductible Vacation Rental Expenses

Once your property is classified in a way that allows for deductions, a wide range of expenses can be claimed. These costs are separated into two main categories: operating expenses and ownership costs. Operating expenses are the day-to-day costs of keeping the rental available for guests and include:

• Utilities and internet service
• Cleaning and maintenance fees
• Supplies such as toiletries and linens
• Advertising costs
• Commissions paid to rental platforms or property managers

Ownership costs are those associated with having the property itself, such as mortgage interest and property taxes. You must distinguish between a deductible repair and a capital improvement. A repair, like fixing a leaky faucet or replacing a broken window pane, keeps the property in good operating condition and is deductible in the year it occurs. A capital improvement, such as replacing the entire roof or remodeling a kitchen, adds value to the property or extends its life and must be depreciated over time.

Allocating Expenses Between Personal and Rental Use

When a property is used for both rental and personal purposes, expenses must be divided between the two uses. Expenses that are directly related to the rental activity, such as management fees, advertising, or commissions paid to booking sites, are 100% deductible against rental income. These are considered direct expenses because they would not exist without the rental activity.

Indirect expenses, which are costs associated with maintaining the property for the entire year, must be allocated. These include mortgage interest, property taxes, insurance, and utilities. The formula for this allocation is based on the ratio of rental days to the total days of use (personal days plus rental days). For example, if you rented your property for 90 days and used it personally for 30 days, the total usage is 120 days. You could then deduct 75% (90 rental days / 120 total days) of your indirect expenses from your rental income.

Understanding Depreciation for Your Rental Property

Depreciation is a non-cash deduction allowing property owners to recover the cost of their property over time as an allowance for wear and tear. You can depreciate the building, any capital improvements made to it, and personal property used in the rental activity, such as furniture and appliances. The value of the land the property sits on cannot be depreciated.

To calculate depreciation, you must first determine the property’s cost basis. The basis is what you paid for the property, including certain settlement fees and closing costs, minus the value of the land. This cost is then recovered over a specific period set by the IRS. For residential rental properties, the recovery period is 27.5 years, meaning you can deduct a portion of the property’s basis each year.

Reporting Income and Expenses on Your Tax Return

You must report rental income and expenses to the IRS, which is done on Schedule E (Supplemental Income and Loss). On this form, you will list your total gross rental income and itemize your various expenses, including the depreciation deduction. The resulting net rental income or loss then flows to your main Form 1040 tax return.

However, if you provide substantial services to guests, such as regular cleaning or providing meals, your rental activity may be considered a business. In this case, you would report your income and expenses on Schedule C (Profit or Loss from Business). Unlike rental income on Schedule E, income reported on Schedule C is subject to self-employment taxes.