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Tax Optimization 101 for Short-Term Rentals
First things first, let’s be honest. Taxes are no one’s favorite thing to do, but keeping yourself informed can help you save a ton of money on your STR-related returns each year. If you’ve found your way to this post, then you’re probably looking for ways to improve your short-term rental tax situation. There are many tax rules and regulations that apply to short-term rentals, and understanding them is essential to minimizing your tax liability.
Below, we’ve provided you with some general “taxes for dummies” tips related to short-term rentals. We’ll cover some of the key tax considerations and strategies you may want to consider to keep yourself and your rental in compliance at the lowest costs possible.
Keep Accurate Records
The first step is to keep accurate records of all income and expenses related to your property. This includes rent payments, cleaning and maintenance costs, property taxes, insurance premiums, and any other expenses related to the rental.
This is essential for three reasons! First, no one likes doing their taxes, so make it easier for yourself by keeping track as you go versus doing it all the week before tax season. This will speed up the process later and ensure you file accurately. Second, accurate record-keeping can help you figure out areas where you can take advantage of deductions and credits. Third, many investors ask for complete profit and loss statements, "P&L," so having these records readily accessible can prove your property is cash-flow positive thus marketing your property better.
Speaking of STR Deductions and Credits…
There are several tax deductions and credits that can apply to short-term rental properties. Some of the most common deductions include:
- Depreciation: You can deduct a portion of the cost of your rental property each year as it depreciates over time.
- Repairs and Maintenance: Repair and maintenance costs to your property like fixing a leaky faucet or repainting a room are tax deductible.
- Travel Expenses: If you travel to your property to perform maintenance or management tasks, you can deduct your travel expenses.
- Home Office Expenses: If you have a dedicated home office that you use for managing your property, you may be able to deduct some of your home office expenses.
- Property Taxes: You can deduct the property taxes you pay on your rental.
There are also several tax credits that may apply to STR properties, such as the Energy Star tax credit for installing energy-efficient appliances or the Earned Income Tax Credit for low-income taxpayers.
Stay Current with Local Tax Laws
In addition to federal tax laws, there may be local tax laws that apply to STR properties in your area. For example, some cities and states impose occupancy taxes and permitting fees on STRs that you should be prepared for. It’s important to understand the local tax laws in your area and ensure that you are complying with all applicable rules and regulations. Failure to do so can result in significant penalties and fines depending on the laws in your area.
We know it’s a lot of work to sift through and monitor all of the regulations in the STR market…did you know Keyturn has regulatory services keeping you up to date with all STR-related current events? Learn more about our regulatory services here.
Consider Forming a Business Entity
You may want to consider forming a business entity, such as a limited liability company (LLC). Forming a business entity can offer several tax advantages including:
- Liability Protection: A business entity can protect your personal assets from liability related to your rental property.
- Lower Tax Rates: Business entities may be subject to lower tax rates than individuals.
- More Deductions: Business entities may be eligible for more tax deductions than individuals.
Whether you’re an individual or part of a group looking to invest, Keyturn can help you set up an entity to execute your purchase to protect you and potential co-investors. Book a meeting with our team and learn how we can help you set up an LLC and achieve your goals.
Think about Timing!
If you have multiple properties, you may be able to time your rental income to maximize your tax liability by spreading it out over multiple tax years. For example, if you have a property that is consistently rented out during the summer months, you may consider renting it out for a longer period of time so that the income is spread out over the year. Other timing strategies might include accelerating or decelerating your rental income. These options may only work under the right circumstances, so do your research and make sure it is possible if this interests you.
Consult with a Tax Professional
If you own a short-term rental property, it’s always a good idea to consult with a tax professional. Tax professionals can help you navigate the complex tax rules and regulations related to STRs and ensure that you are optimizing your tax situation to the fullest extent possible.
Experts like those at Avalara “live and breathe tax compliance so you don’t have to.” Offering automated tax software that streamlines your tax compliance responsibilities, Avalara aims to take the stress out of taxes and help you grow responsibly.
Optimizing your tax situation is a key consideration when owning a short-term rental property. By keeping accurate records, taking advantage of deductions and credits, understanding local tax laws, considering forming a business entity, and consulting with a tax professional, you can minimize your tax liability and maximize your profits.