Let’s say you just replaced the outdated kitchen appliances in your short-term rental, hoping to attract more guests, enhance their experience, and increase your rental income. 

The next thing you might wonder is if those new appliances—and numerous other expenses—can significantly reduce your taxable income when properly deducted. 

In this article, we share 14 essential tax deductions for your short-term rental properties, clarify the 14-day/10% IRS rule, and discuss best practices for meticulous recordkeeping. Tax deductions for short-term rentals can be complex, but a greater understanding of what you can deduct could save you a lot of money each year.

Key tax deductions for short-term rentals

1. Depreciation

Depreciation lets you spread certain costs related to your rental property and significant improvements over several (or many) years, reducing your taxable income each year.

For short-term rentals (STRs), you typically use a recovery period of 27.5 years for residential properties. While you can’t depreciate the land your property sits on, you can depreciate other items like appliances and furnishings, sometimes over just a few years.

Though depreciation can impact your taxable net income, it doesn’t affect your cash flow. That means you benefit from reduced taxes without spending additional cash, maximizing your investment’s after-tax profitability.

2. Property taxes

Property taxes can be a significant expense for short-term rental owners, especially if you’re in a desirable vacation area where property values and/or tax rates might be higher.

The good news is these higher property taxes can translate into a more substantial deduction on your tax return, reducing your taxable income. Keep in mind that property tax rates can vary significantly from one state or municipality to another.

3. Cleaning and supplies

Frequent turnover of guests in STRs means that cleaning and housekeeping supplies become a regular and necessary expense, which can be a significant tax deduction. Unlike long-term rental property, where you might only clean between vacancies, short-term vacation rentals require a thorough cleaning after each guest, and those costs can add up quickly.

Regularly restocking essentials, such as toiletries, kitchen supplies, and cleaning products, is necessary for a positive guest experience. As a result, these expenses are also tax-deductible. Keep detailed records by property to help ensure you claim every possible deduction.

4. Repairs and maintenance

Repairs and maintenance are actions you take to keep your property in good working order or restore it to its original condition. These costs are fully deductible in the year they are incurred.

Here are a few examples of deductible repair expenses in short-term rentals:

• Plumbing and electrical repairs
• Landscaping maintenance
• Snow plowing services
• Fixing broken locks or door handles
• Replacing damaged linens or towels
• Repairing broken furniture or decor items
• Fixing malfunctioning keyless entry systems
• Replacing shattered glassware or dishware
• Repairing damaged outdoor furniture
• Fixing broken hot tubs or pool equipment
• Mending torn window blinds or curtains
• Repairing or replacing damaged welcome amenities like coffee makers
• Fixing issues with Wi-Fi or smart home devices

5. Improvements

Improvements are substantial changes or additions to your property that enhance its value, extend its useful life, or adapt it to new uses. Unlike repairs and maintenance, which are fully deductible in the year they occur, you must capitalize and depreciate improvements over time.

These are some examples of property improvements:

• Adding a new deck
• Remodeling a kitchen or bathroom
• Installing a security system
• Replacing the HVAC system
• Enhancing curb appeal by investing in new landscaping elements
• Updating flooring
• Finishing an attic or basement

6. Mortgage interest deduction

Because the IRS considers a short-term rental to be an investment property, there is no limit to the mortgage interest deduction. However, to be eligible for this deduction, the mortgage must be secured on the property you rent, and you must use the loan proceeds to buy, build, or improve the rental property.

In addition to mortgage interest, private mortgage insurance (PMI) premiums may also be deductible.

7. STR insurance premiums

The risks associated with short-term rentals are generally greater than long-term rentals due to frequent guest turnover, differences in how the property is enjoyed by the occupants, and the guests’ relative lack of familiarity with the property versus a long-term renter. These factors can lead to more wear and tear, a greater likelihood of accidental damage, and increased liability exposure.

Obtaining short-term rental insurance (and/or the appropriate policy rider) is crucial for property owners to protect against unique risks that standard homeowners or standard landlord insurance may not cover. STR insurance typically includes coverage for damage caused by guests, liability protection in case of a guest injury on the property, and loss of income due to covered incidents.

8. Marketing and advertising

Marketing and advertising expenses for short-term rentals can be significantly higher than for long-term rentals, especially in competitive vacation rental markets. The need to constantly attract new guests means short-term rental owners must invest more in promoting their properties to stand out.

Some marketing and advertising expenses for short-term rentals include:

• Professional photography services to showcase the property
• Search engine optimization (SEO) services to improve online visibility
• Social media advertising campaigns targeting potential guests
• Printing and distribution services for promotional materials, such as brochures or guidebooks for local tourist spots
• Engaging influencers or bloggers to review and promote the property

9. Property management software tools

As a short-term rental property owner, you have access to a variety of software tools designed to simplify your operations and improve your property’s financial performance. These tools range from booking and calendar management platforms to dynamic pricing software and automated messaging systems that help manage guest communications.

Utilizing property management software for recordkeeping offers numerous benefits, helping organize your financial data so it’s easily accessible. Automated bookkeeping features categorize your expenses, track income, and generate detailed reports, facilitating tax preparation and helping you make informed decisions about your investment.

10. Furniture and appliances

Unlike your property, which has a longer depreciation period, items like furniture, appliances, carpeting, and landscaping typically depreciate over a shorter period, often 5 to 7 years. This accelerated depreciation helps you recover the cost of these items more quickly, reducing your taxable income sooner.

By breaking down, or cost segregating, the components of your property into different categories, you can assign shorter depreciation periods to items that wear out faster. This approach maximizes your depreciation deductions, making your investment in high-quality furnishings and appliances more financially advantageous.

11. Property management and legal expenses

Managing a short-term rental often means incurring higher property management fees than long-term rentals. That’s because STRs require more frequent cleaning, experience higher guest turnover, and need greater hands-on attention to maintain a high standard of service and satisfaction.

As a result, you can also deduct various legal fees associated with operating your vacation rental. That may include costs for drafting rental agreements, handling disputes, obtaining permits and licenses, and seeking legal advice on regulatory compliance.

12. Platform fees and commissions

When listing your STR on rental platforms like Airbnb or VRBO, you incur platform fees, such as service charges and booking fees. These costs are part of utilizing these popular marketplaces to reach a broader audience and secure bookings.

These platform fees are fully tax-deductible (but only if they are also included in your reported rental income), helping you offset those expenses against your rental income and reduce your taxable income. Note that the major platforms typically charge their fees prior to distributing funds, so you may not be able to deduct these fees if you are only booking net distributions from the platforms as income. Also, you can deduct any commissions paid to real estate professionals or property managers for their leasing services.

13. Travel and transportation

Owning a short-term rental often requires travel for business-related reasons, such as visiting your property, meeting with property managers, or attending industry conferences. These travel expenses, including airfare, lodging, car rentals, and meals, are deductible if they’re directly related to the management and operation of your rental property.

To ensure you maximize your deductions while complying with IRS regulations, follow these best practices for tracking business travel costs and keeping them separate from personal expenses:

• Keep detailed records of your travel dates, destinations, and purposes.
• Use a mileage tracking app or logbook and accurately record the miles you drive for business purposes. 
• Separate your personal travel expenses from your vacation rental business expenses, especially when you combine business trips with personal travel.
• Save the receipts for all your business travel-related expenses, including transportation, accommodation, and meals.
• Ensure that the primary purpose of your travel is business-related to qualify for these deductions.

14. Home office

You may be eligible for a home office deduction if you manage your short-term rental business from home.

To qualify, you must use the space exclusively and regularly for business purposes, such as managing bookings, handling finances, and communicating with managers or guests. The area can’t double as a personal living space, like a guest bedroom or family den.

You can calculate your home office deduction by using one of two options. One method is the simplified option, which allows you to deduct $5 per square foot of your home office up to 300 square feet maximum.

The second option is the regular method, which involves calculating the actual expenses related to your home office, including a proportionate share of rent, mortgage interest, utilities, and maintenance costs.

How to claim tax deductions for a short-term rental

Before claiming tax deductions for a short-term vacation rental, it helps to understand the 14-day or 10% rule.

According to IRS guidelines, if you rent out your property for 14 days or less in a year, you don’t have to report the rental income, but you can’t deduct any rental expenses. If you exceed this threshold, the IRS considers the property a rental for tax purposes.

Alternatively, should you personally use your property for more than 10% of the total days it’s rented at a fair rental price, you must divide your expenses between personal and rental use.

For properties rented out for more than 14 days but also used personally, the IRS mandates that you allocate expenses proportionally based on the time the property was rented versus personal use.

For example, if you rent your property for 60 days and use it for yourself for 30 days, you can claim 67% (60/90) of the eligible expenses as rental deductions.

Schedule E (Form 1040)

When reporting your short-term rental income and deductions, you generally use Schedule E (Form 1040), Supplemental Income and Loss. This form helps you detail income received and deductible expenses like mortgage interest, real estate taxes, maintenance, and depreciation.

Keeping meticulous records throughout the year is essential for properly reporting and maximizing deductions. When you can organize the relevant documentation, it simplifies the process of filing your taxes and claiming your deductions.

Best practices for recordkeeping

Proper documentation helps you optimize your allowable deductions and protects you in case of an IRS audit. Storing and properly classifying receipts, invoices, and financial records helps give you quick access to necessary information when tax time rolls around. Here are a few key recordkeeping practices: 

• Record transactions immediately: Enter all income and expenses into your accounting system as soon as they occur to avoid forgetting details.
• Separate personal and business finances: Use dedicated bank accounts and credit cards for your rental activities to simplify tracking and prevent mixing personal expenses with business expenses.
• Keep detailed expense categories: Organize expenses into specific categories (e.g., maintenance, utilities, and marketing) to make it easier to track and report.
• Store receipts digitally: Scan or photograph paper receipts and store them in cloud-based applications to ensure you don’t lose or damage them.
• Regularly review records: Set aside time weekly or monthly to review and reconcile your financial records, which helps keep your records up to date and accurate.
• Use accounting software: Leverage reliable accounting software to automate and streamline the recordkeeping process, reducing the likelihood of errors.
• Maintain backup copies: Back up your digital records regularly to prevent data loss due to hardware failure or other unexpected issues.

Optimize your tax deductions with Stessa

Managing your tax deductions doesn’t have to be confusing or overwhelming. Stessa can help you simplify your short-term rental operations and make the most of the tax deductions available for your rental property. 

With Stessa you can:

• Track STRs, single-family homes, and small multifamily properties.
• Automatically track income and expenses, property value, and your equity.
• Monitor property performance in real time at both the portfolio and property level via the owner’s dashboard.
• Generate financial reports and export tax-ready statements to save time and money.
• Organize and store your property documents safely and securely online.
• Use iOS and Android mobile apps to track expenses on the go.

Join over 200,000 landlords who use Stessa to automate their accounting, track expenses, and stay organized for tax season. Use the platform to keep meticulous records more effortlessly and focus on growing your short-term rental business.

Get started with Stessa today and take the first step toward low-stress property management.