What are the Tax Benefits of Owning a Short-Term Rental Property?

What are the Tax Benefits of Owning a Short Term Rental Property?

Owning a short-term rental property offers several tax benefits, making it an attractive investment. Here are the main tax advantages:

Deductions for Short-Term Rental Expenses

• Operating Expenses: You can deduct expenses related to managing and maintaining the property, such as:
  • Property management fees
  • Utilities (electricity, water, internet, etc.)
  • Cleaning and maintenance costs
  • Marketing and advertising expenses
  • HOA fees, if applicable
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• Supplies: Costs for furnishing the property, purchasing linens, toiletries, or kitchenware are deductible.
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• ‍Depreciation - The IRS allows you to depreciate the structure of your property (not the land) over 27.5 years. This depreciation deduction reduces your taxable income, even if the property's market value appreciates over time.
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• Mortgage Interest Deduction - If you have a loan on the property, the interest paid on the mortgage is tax-deductible.
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• Property Tax Deduction - You can deduct property taxes on your short-term rental property as a rental expense.
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• Pass-Through Deduction (Qualified Business Income) - If your short-term rental qualifies as a trade or business, you may be eligible for the Qualified Business Income (QBI) deduction, allowing you to deduct up to 20% of your net rental income.
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• Travel Expenses - If you travel to the property to manage or maintain it, those travel costs (mileage, airfare, lodging, etc.) can be deductible, provided the primary purpose of the trip is business-related.
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• Repairs and Maintenance - Costs for repairs to keep the property in good condition are deductible. Examples include fixing plumbing, painting, or replacing broken appliances.
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• Startup Costs - Initial expenses for getting your short-term rental business running, such as legal fees, permits, and professional services, can be deductible up to certain limits.
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• Home Office Deduction - If you manage your rental property from a dedicated space at home, you may qualify for a home office deduction.
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• Tax Deferral Through 1031 Exchange - When you sell a short-term rental property, you can defer capital gains taxes by reinvesting the proceeds into another investment property through a 1031 exchange.
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• Active Participation in Rental Activities - If you actively participate in the management of your short-term rental, you may be able to deduct up to $25,000 in rental losses against your non-passive income (subject to income limits).
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• Bonus Depreciation - Costs of furniture, appliances, and other equipment with a useful life of 20 years or less may qualify for 100% bonus depreciation in the year they’re placed into service.
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• Short-Term Rental Specific Rules (Material Participation) - If you materially participate in the management of the short-term rental and it is rented on a short-term basis (average stay is seven days or less), it may be considered non-passive income. This can allow for greater deductions against other active income.

By leveraging these tax benefits, you can significantly reduce the overall tax burden on your short-term rental income, enhancing the profitability of your investment.