Brilliant Deductions for Vacation Homes
It's tax time again! If you own a second home that you rent to vacationers, you're probably not looking forward to scurrying around trying to figure out how much rental income you collected last year. (The more you made, the more you'll pay to Uncle Sam, right?) But vacation home rental expert Christine Karpinski advises you not to procrastinate much longer. Why? Because the process will yield information you'll need to claim deductions against your rental income on your state and federal income tax returns – so the more thorough your search, the more you'll save.
"The tax rules and deductions for second homeowners who rent out their properties on a short-term basis are complex," says Karpinski, director of Owner Community for HomeAway.com. "Deductions depend on many factors, including how often you personally use your second home, how many nights or a percentage of the nights you rent out your home and your personal adjusted gross income (AGI). It's a lot of information, and as with most big undertakings, it's best to dive right in."
Karpinski, the author of How to Rent Vacation Properties (Kinney Pollack Press, 2007) and Profit from Your Vacation Home Dream: The Complete Guide to a Savvy Financial and Emotional Investment (Kaplan, 2005), says most vacation homeowners are better off using a tax accountant or tax attorney to prepare and file their income taxes.
"Unless you have a strong background in accounting, it's too easy to miss something critical," says Karpinski, adding that all the details can be found in the IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes). "But that doesn't mean you can't save yourself lots of money by doing some thorough legwork before heading out to the tax preparer's office."
Where to Start
Whether your vacation rental home was profitable or not, you'll surely have many deductions that can be applied to help offset your rental income. Karpinski offers the following list of things you should gather and consider when preparing your income taxes:
Figure out your gross rental revenue. Your gross rental revenue would be all monies collected from renters (and kept). This includes the following:
- Base rental rate
- Cleaning fees
- Parking fees
- Amenity fees
- Pet fees
- Any portion of a security deposit that you keep
(Note that gross rental revenue does not include monies that you return to the renter upon departure, such as refunded deposits, refunded pet deposits and sales taxes collected and paid to your local or state sales tax office.)
"To calculate the base rental rate that a guest paid, divide the total that the renter paid by the tax rate in decimal format (the percentage divided by 100) plus one," Karpinski says. "For example, say you billed your renter for $1,672.50 but cannot remember the base rental rate that you charged (pre-tax). If your sales tax rate is 11.5 percent, take the $1,672.50 and divide it by 1.1150 (your sales tax rate converted to a decimal plus one) and you will come up with $1,500, which is the base rental rate."
Know which costs can be deducted or amortized. Deductions can be made in many of the areas associated with renting out your vacation home. Take a look at the deductions checklist below to make sure you don't miss out on any possible deductions. The best way to use the checklist? Gather up the documents you have for all of the information listed below and provide them to your tax professional, who can determine what is deductible in your situation:
Mortgage, Taxes and Insurance
- Property taxes
- Property insurance
- Hurricane/wind/flood insurance
- Liability insurance
- Mortgage interest
- Private mortgage insurance (PMI)
- Refinance and/or closing fees
- Special assessments (may be amortized under capital improvements)
- Travel expenses to attend meetings
- Utility bills, including power, gas, water/sewer, phone, cable/satellite TV service, Internet service, etc.
- Housekeeping expenses
- Expenses incurred to repair damages
- Out-of-pocket payments/deductibles for insurance claims
- Maintenance expenses, including pest control, lawn and garden upkeep, preventive maintenance, etc.
- Extra compensations to renters, housekeepers, maintenance (including holiday gifts/bonuses)
- Linens and linen cleaning services
- Supplies, including paper towels, toilet paper, cleaning supplies, etc.
- Travel expenses to your vacation home to do maintenance (must be well documented)
- Meals while you are in your vacation home on "maintenance trips"
- Property management fees and commissions
- Home office expenses, including computer equipment, furnishings, utility bills, etc., based on the percentage of business use vs. personal use (usually a portion based on the percentage of square footage of your home office – for example, if your home is 2,000 square feet and you have a 200-square-foot home office that you use solely for your vacation rental business, then 10 percent of your household expenses may be tax deductible)
- Your ads on HomeAway.com, VRBO.com, CyberRentals.com or any other Web site or advertising vehicle, including any special offers, extra photos, etc.
- Business cards and other printing costs
- Web site building and hosting expenses
- Photography, virtual tours, copywriting services
Capital Improvements and Amortized Items
- Improvements on your home
- Furnishings and décor
- Depreciation deductions
- Tools (hammers, saws, etc.)
- Cameras, computers, cell phones and other equipment necessary to run your vacation rental business
- Checking account and credit card account administrative fees (for business purposes only)
- Postage for mailing contracts, directions, security deposits, etc.
- Legal fees
- Delivery of your "vacation rental hometown" newspaper
- Income tax preparation
- Educational expenses – seminar attendance and/or books about renting your vacation home
Things to Keep in Mind
Two things you should remember about deductions: First, if you're deducting items that you've purchased, they must be used solely for your vacation rental business in order to be considered deductible. For example, you cannot buy a hammer, nail in one nail and then take it to your primary home and "call it" a deduction for your vacation rental home.
Second, items such as cameras, cell phones, computers, etc., are generally deductible on a percentage of usage basis. For instance, if you use your computer only for inquiries and bookings, then you would likely be able to deduct 100 percent of the cost of that computer. However, if the computer is also a "family computer," only a portion of the cost would be deductible.
"No one looks forward to tax season," Karpinski says. "And it becomes even less appealing when you have a mountain of documents to locate for your vacation rental. But when you get your income tax return check in the mail – or when you see how much less you have to pay out in taxes based on the deductions you've uncovered – you'll agree that the time and effort are well worth it."
Note: The above is intended as a general guideline and should not be construed as tax advice. Be sure to consult your tax professional.