If you want to improve profitability on your vacation rental you should take full advantage of all tax write-offs that are available to you. Whether this is your first vacation rental property or you’ve been at this for years, we have five suggestions to make your vacation rental more profitable by helping you maximize your deductions during tax season.
Vacation Rental Depreciation
The depreciation on your vacation rental home can be a significant tax benefit that you can begin writing off the first year you start renting out your property. But the type of property you own plays a big role in how much you can deduct because land doesn’t depreciate.
“In a condo, you don’t have land so it’s all going to be depreciable,” says Bob Wheeler, CPA and author of The Money Nerve: Navigating the Emotions of Money. “But if you have a property with very valuable land and a house that isn’t worth much, you won’t see much depreciation,” he notes.
Improvement Depreciation
Don’t be caught off guard when you have to depreciate certain purchases and improvements over a longer period of time than you had anticipated.
“If you have a business and you spend $5,000 on equipment, you can take an immediate write-off,” says Wheeler. But rental properties are different. If you buy a $5,000 washer and dryer for your vacation home you would have to depreciate that cost over 5 to 7 years, Wheeler points out. And if you added a room to the home, you’d depreciate that cost over 27.5 years.
So how does this affect you during tax season? You may not be able to write off the entire cost of any property improvement or renovation during the year you paid for it.
Consult with a tax professional to find out how a costly home improvement could affect your taxes. The rules surrounding different types of write-offs are complicated and change from time to time. It’s a tax professional’s job to stay current with these changes.
Personal and Rental Items
Wheeler also states that rental property owners sometimes neglect to deduct items that they use for both personal and rental purposes. Items like toilet paper, towels and soap can add up to a significant total expense over the course of a year.
But how do you keep track of exactly how much you’ve spent and who is using it? Wheeler notes that it’s not necessary to get quite so detailed with your record-keeping. “If you’re staying at the property about 10% of the time and you’re renting it out about 90% of the time, you can create a reasonable estimate,” he says.
Fees and Insurance
Be sure to deduct all fees you incur throughout the year and insurance costs on your taxes. Fees may include HOA fees, legal fees, landlord insurance, homeowners insurance flood insurance and more. You can only deduct the cost of any insurance for the applicable tax year.
Small Expenses Add Up
The smaller expenses don’t seem like much to worry about but when you put them all together they can add up to a significant amount. Expenses may include the cost of advertising, travel, lawn services, cable, internet, utilities, laundering, and pool services. To be safe, save all your vacation home receipts throughout the year and your tax professional will know what can and can’t be used.
Keep these five suggestions in mind when it’s time to do your taxes and you should see more profitability on your vacation home rental.