As a real estate investor, it is important to be aware of all the tax deductions you can take advantage of.
How do Tax Deductions for Short-Term Rental Properties Work?
Keep in mind that these deductions may vary depending on your location and other factors, so be sure to speak with a qualified tax advisor to learn more.
Here are 14 short-term rental property tax deductions you can use in 2022:
- Mortgage Interest Paid
Interest paid towards a mortgage and interest on a business credit card used to purchase services, materials, and supplies for the property is a deductible expense. At the end of each year, the lender will send a statement itemizing annual interest expenses to make the reporting of the deduction easier.
- Taxes Paid on the Property
Property taxes on a mid-sized single-family rental home will vary depending on where the property is located. Property taxes can be fully deducted from income generated by a rental property.
- Insurance Premiums
Insurance premiums are another tax deductible expense short-term real estate investors can claim. Rental property investors can purchase this policy to help protect the home and for extra liability protection.
Real estate investors can help offset the cost of rental property through deductions for depreciation. Utilizing depreciation properly is a great tax strategy to protect your profits. that IRS Publication 946 explains how to depreciate residential real estate over 27.5 years to reduce taxable net income. For example, if the value of a single-family rental home is $110,000 (excluding the lot), investors can claim a depreciation expense of $4,000 per year. The IRS also allows rental property owners to depreciate items such as new appliances and carpeting over 5 years, office furniture and equipment over 7 years, and roads and fences over 15 years. Also, investors can take advantage of Bonus Depreciation which in 2022, allows you to depreciate 100% your assets with a life span of 20 year or less in the year you place it in service. This is the gravy on top! The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.
Utilities can be included as a part of the operating expenses for a rental property. This would include electricity, water, trash removal, and natural gas. A portion of the telephone bill can also be deducted if it is used for business purposes.
- Maintenance and Repairs
Routine maintenance and repairs are also tax deductible. This would include changing the air filter, painting the walls, fixing a loose doorknob, etc. Major repairs such as replacing the roof or HVAC system are considered capital improvements and can be depreciated over time.
- Janitorial Services/Housekeeping Services
If you hire someone to clean the rental property, that expense is tax deductible.
Any expenses related to advertising the property, such as listing fees on rental websites or print ads, can be deducted.
- Legal and Professional Fees
If you hire an attorney or accountant to help with the rental property, those fees are tax deductible.
- Licenses and Permits
Depending on your location, there may be licensing and permit fees required to operate a rental property. These fees are tax-deductible.
Furnishing may be an added expense when first starting out, but it is a deduction for short-term rental property owners and you can even take bonus depreciation on this expense.
- Linens and Towels
Linens and towels are a necessary expense for short-term rentals. They can be deducted as part of the operating expenses.
If you need to purchase new appliances for the rental property, those expenses can be deducted and you can even take bonus depreciation on this expense.
- Cable and Internet Service
If you provide cable or internet service as an amenity for tenants, those expenses can be deducted.
Is rental income ordinary income?
No. Rental income is passive income which is not subject to self-employement tax. You can deduct allowable costs in order to reduce rental income—and lower your tax burden—by deducting these expenses. Rental property owners can typically deduct most, if not all, of the expenses associated with managing and maintaining their properties. These deductions may include any payments made that are related to the property itself.
Can I capitalize property taxes on an investment property?
You may capitalize the expenses associated with your investment property, such as interest and property taxes, as well as other carrying charges like insurance and maintenance fees.
By preparing your rental business for tax season before the deadline you can make sure you capitalize on all of these tax deduction opportunities. The real estate investing tax code can change so it is important to always stay up to date with the current tax laws.
Jose A. Ramirez is an experienced tax strategist who helps investors in the Real Estate industry, including those in the activity of Short-Term Rental such as AirBNB and VRBO, Landlords, Wholesalers, Rehabbers, Flippers, Real Estate Brokers and Realtors. Schedule an appointment with Jose A. Ramirez for any additional questions you may have about this recent event. Make sure you are subscribed to the Advanced Tax Advisors email list so you can receive current events just like this in the future.