Short-Term Rental Tax Deductions for Airbnb Hosts & Real Estate

It's essential for Airbnb hosts and other real estate investing entrepreneurs in the short-term real estate vacation rental industry to take advantage of every eligible business tax deduction. Claiming tax deductions is a great way of reducing your short-term rental business's tax liability by lowering your total taxable income.

Airbnb hosts and other real estate professionals can use this guide to short-term rental tax deductions, a complicated topic, to gain insight into reducing their annual tax bills.

Short-term rental tax deductions key takeaways: 

• Learn about the top short-term rental tax deductions for which you may be eligible to reduce your tax burden

• Understand how to qualify for IRS short-term rental classification 

• Grasp the importance of depreciation and how to understand this deduction 

• Browse essential forms you may use for tax purposes

10 Short-Term Rental Tax Deductions Airbnb Hosts (and Others) Should Claim

Whether you’re in the vacation rental business or own a single vacation rental property, use this list of tax deductions associated with your short-term rental property activities to reduce your real estate tax burden. Keep records, such as receipts, invoices, and other supporting documentation, to ensure the smoothest and most efficient tax preparation process. 

Depreciation

Depreciation allows you to spread out rental property costs and match depreciation expenses with revenue during the same period. If your rental property meets the following requirements set by the IRS, it qualifies for depreciation: 

• You own the short-term rental property (STR)

• You use the property in your business or income-producing activity, like rentals

• Your property has a determinable useful life (A time limit of 27.5 years for a residential rental property’s useful life is imposed by the IRS)

• Your property is expected to last more than a year 

Airbnb hosts and other real estate professionals can begin taking depreciation as a deduction when they can use their properties as rentals. You must stop using the depreciation deduction when you have fully recovered your costs related to the property’s value or other basis or when you retire your rental property from use. 

Cost segregation

If you've made improvements to your Airbnb rental property that you expect will depreciate faster than 27.5 years, you may benefit from a cost segregation study.  A cost segregation study will identify rental property assets that can be depreciated over a shorter time, commonly 5, 7, or 15 years. In addition to ensuring IRS compliance, the cost segregation study may benefit your rental property in the following ways: 

• Boosting cash flow 

• Tax benefits, such as uncovering lesser-known tax deductions 

• Improved return on investment 

Furniture and furnishings

Airbnb properties with the best accommodations typically get the most attention, which can lead to increased bookings and revenue. Most tables, chairs, couches, decorations, and other furnishings and furniture you buy to improve and make your short-term rental more appealing to guests and renters can be written off.  

Maintenance and cleaning

It's essential that your Airbnb residential property is clean and presentable for each new guest who rents from you. It is also important to maintain the property to ensure it's usable and reflects the quality of your listing. Maintenance and cleaning fees you've paid throughout the year, which can be sizable, may be deducted as business expenses. 

Commissions and fees, including Airbnb commissions

Airbnb charges a 20% service fee to cover their costs for products, services, and support. Airbnb automatically withholds these fees from your payouts, which are typically released 24 hours after an experience. There is a protocol to recover this fee if a guest requests a refund for a booking where it was applied.

Commissions and fees related to your short-term rental property can be claimed as a tax write-off. 

Insurance

Various types of property insurance are used to cover costs in the event of a fire, wind, or other damage caused to a structure. Property insurance premiums can be deducted as a business expense because your short-term rental property is for business use, not personal use.

Other types of insurance associated with your investment property may be deductible, such as private mortgage insurance (PMI). You would typically get PMI if a lender requires it due to loan type or down payment.  

Mortgage and interest

Many short-term rental property owners and Airbnb hosts will make mortgage payments as they operate their businesses. Mortgage interest for your rental property can be written off entirely if the property is used exclusively as a rental or for the portion it is used throughout the year by guests. 

Taxes

Like mortgage interest, property taxes associated with your short-term rental can be deducted whether used partially or exclusively for business.  

Advertising and marketing

You've paid to decorate, clean, and maintain your short-term rental property, which is essential to attracting guests and maintaining a good reputation. These activities also support the advertising and marketing of your property to prospective guests.

Ad creative, advertising fees on social media and more traditional channels, and other forms of marketing meant to attract guests are tax-deductible expenses.  

Legal and accounting fees

Professional services used for your short-term rental business, such as the legal consultation of a lawyer or the accounting and financial solutions from a full-service virtual accounting firm, are tax deductible. While Airbnb hosts and other real estate entrepreneurs may attempt to address these responsibilities without the aid of a professional, as your short-term rental portfolio expands, so will the legal and accounting complexities, making these services an indispensable part of conducting your business. 

Understanding Depreciation for Short-Term Rentals

Your rental property must have a useful life, be used for business activities, and be expected to last more than a year to qualify for depreciation. Rental properties placed in service before 1987 use one of the following depreciation methods:

• Accelerated Cost Recovery System (ACRS), if your property was placed in service after 1980 but before 1987

• Straight line or declining balance method, used over the useful life of rental properties placed in service before 1981

If your short-term rental property was placed in service after 1986, it will use the Modified Accelerated Cost Recovery System (MACRS) depreciation method. We expect most modern rentals, including Airbnb, to adhere to MACRS.

It is optimal to claim the appropriate amount of depreciation for your rental property throughout its lifetime. To calculate depreciation for your rental property, follow these four steps: 

1. Determine the basis of your property

2. Separate the cost of buildings and land 

3. Determine your basis in the house

4. Determine the adjusted basis if necessary

Ensure you properly depreciate your short-term rental property with 1-800Accountant's year-round tax advisory service.

Qualifying for IRS Short-Term Rental Income Classification

Your short-term rental income must be considered active to qualify for many tax deductions. A salary from a job is considered active income, while income received from investments where you're not actively working for that revenue, such as collecting rent, is considered passive income.

There are exceptions originally written to benefit hotels and motels that short-term rental property owners can take advantage of to allow rental income to be classified as active instead of passive. Because these exceptions weren't intended for modern short-term rental platforms such as VRBO, it's common for these exceptions to be viewed as loopholes among some real estate professionals.

Short-term rental property exceptions include: 

1. The average period of customer use for such property is seven days or less

2. The average period of customer use for such property is 30 days or less, and significant personal services are provided by or on behalf of the owner of the property in connection with making the property available for use by customers

3. Extraordinary personal services are provided by or on behalf of the owner of the property in connection with making such property available for use by customers (without regard to the average period of customer use) 

4. The rental of such property is treated as incidental to a nonrental activity of the taxpayer

5. The taxpayer customarily makes the property available during defined business hours for nonexclusive use by various customers

6. Or, the provision of the property for use in an activity conducted by a partnership, S corporation, or joint venture in which the taxpayer owns an interest is not a rental activity

How to Claim Tax Deductions for Short-Term Rental Income

Use the records you've retained throughout the year and other supporting documentation to prepare and file your business tax return. Forms you may use to file your taxes and claim tax deductions include: 

IRS Form 1040

Individual taxpayers file IRS Form 1040, U.S. Individual Income Tax Return. Form 1040 calculates your federal taxable income and tax liability.

You should also file schedules to report independent contractor income: Form 1040 Schedules C and E.

Form 1040, Schedule C

To report business income and expenses, file IRS Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Schedule C calculates your business income or loss and is typically used when you provide substantial services (regular cleaning, laundry, etc.) for your short-term rental property. 

Form 1040, Schedule E

Report income or losses from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits by using Schedule E (Form 1040), Supplemental Income and Loss.

Long-Term Savings on Short-Term Rental Taxes with Expert Help

Expert tax advice regarding your short-term rental property can reduce your tax liability and the chances of a run-in with the IRS due to misclassification of income or clerical error. Engaging in property management while handling tax responsibilities can be a serious challenge, which is why many Airbnb hosts and other short-term real estate investors trust the CPAs and tax professionals at 1-800Accountant, America’s leading virtual accounting firm, for their real estate accounting needs each tax season.

Save time and achieve your annual real estate financial goals with our suite of affordable, tax-deductible financial services. Schedule a quick consultation–usually 30 minutes or less—to learn how tax advisory, quarterly estimated taxes, and business tax preparation and filing will help your real estate business maintain full IRS compliance with maximum tax savings.