Tax Benefits of Vacation Rentals

by Tiffany Ann Goodall | December 2, 2015

dream-hawaiian-home-freeimages1216984-640x400In light of recent news on the regulation of vacation rentals, it is important to know about their taxability—why they are beneficial for both revenue and losses and how to remain compliant with tax laws while taking advantage of these benefits.

Since Airbnb began in 2008, there are now over 1,130 vacation rentals available in Santa Barbara with 725 of these rentals offering the entire residence for rent. These spaces rent for anywhere between $65 per night all the way up to $3,600 per night. Homeowners are not the only ones earning additional income from this new fad, as the City of Santa Barbara collected over $800,000 in transient occupancy taxes (TOT) from vacation rentals last year alone.

Do you own more than one residential property? Do you travel a lot and want to rent out your home while you are gone? Are you considering a vacation rental? After you have determined whether your community is zoned for such an endeavor, there are a few considerations from a tax perspective to keep in mind.

First, if you rent out the property for less than fifteen days during the year and use it personally for more than fourteen days, it is not treated as “rental property” at all. In the right circumstances, this can produce significant tax benefits. Any rent that you receive is not included in your income for tax purposes, no matter how substantial the amount. However, you can only deduct property taxes and mortgage interest as you normally would; no other costs are deductible, and no depreciation is allowed.

If you choose to rent out the property for more than fourteen days during the year, you must include the rent you receive in your taxable income for the year; however, you can deduct part of your operating expenses and depreciation. These expenses must be allocated between personal use days and rental days. For example, if your home is rented out for 275 days, and used personally for 90 days, then 75% of the use of the property is rental. First, you would allocate 75% of your interest and property taxes. Then, you would allocate 75% of your maintenance, utilities, insurance and other costs to rent, and finally, your depreciation allowance. The remaining 25% of interest and taxes would still be reported on Schedule A as an itemized deduction. If the rental income exceeds these allocable deductions, then you would report the rental income with your other income. If the expenses exceed the income, you may be able to claim a rental loss.

You cannot claim the loss if you use the home personally for more than the greater of fourteen days, or 10% of the rental days. If the personal use is less than those amounts, you can claim a rental loss. This loss can only offset other passive income; it cannot offset other ordinary income, with some exceptions. This loss can, however, be carried forward to offset future rental and other passive income.

Don’t forget to check with your city to determine whether your neighborhood is zoned for rental use and to apply for your business license in order to pay your TOT.

Please contact your BPW advisor at (805) 963-7811 if you have questions about your vacation rentals.