April 15th is just around the corner. For many vacation home owners it means scurrying around figuring out how much rental income you collected last year. But remember there are likely deductions you can claim against your rental income on your state and federal income tax returns.  The tax rules and deductions for second home owners who rent out their properties on a short term basis are complex.

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). Refer to the IRS publication 527 “Residential Rental Property (Including Rental of Vacation Homes.)”

If you rent out your second home, your income taxes can become pretty complicated. You may want to seriously consider using a tax accountant or tax attorney to prepare and file your income taxes.

Whether your vacation rental home was profitable or not, you'll surely have many deductions that can be applied to help off-set your rental income. Here's is a list of things you should gather and consider when preparing you income taxes:

Figure out your gross rental revenue:

o Your gross rental revenue would be all monies collected from renters (and kept). This includes:

• Base rental rate
• Cleaning fees
• Parking fees
• Amenity fees
• Pet fees
• Any portion of a security deposit that you keep
• Gross rental revenue does not include monies that you return to the renter upon departure:
• Refunded deposits
• Refunded pet deposits
• Sales taxes collected and paid to your local or state sales tax office

o • Note: 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. For example, you billed your renter for $1672.50 but cannot remember the base rental rate that you charged (pre-tax). If your sales tax rate is 11.5%, take the $1672.50 and divide it by 1.1150 (your sales tax rate converted to a decimal + 1) and you will come up with $1500, which is the base rental rate.

And for those of you more math-oriented, click here to see a detailed formula for calculating your sales tax amount and base rate.

The following is a list of expenses that may be fully or partially deductible or amortized on your income taxes. At minimum you will want to gather this information and provide it to your tax professional who can determine what is deductible in your situation:

Mortgage, Taxes and Insurance

o Property Taxes
o Property Insurance
o Hurricane/Wind/Flood Insurance
o Liability Insurance
o Mortgage Interest
o Private Mortgage Insurance (PMI)
o Refinance and/or Closing Fees

Homeowners Association

o Dues
o Special Assessments (may be amortized under capital improvements)
o Travel expenses to attend meetings

Operating expenses

o Utility bills, including power, gas, water/sewer, phone, cable/satellite TV service, internet service, etc.
o Housekeeping expenses
o Expenses incurred to repair damages
o Out of pocket payments/deductibles for insurance claims
o Maintenance expenses including pest control, lawn and garden upkeep, preventative maintenance, etc.
o Extra compensations to renters, housekeepers, maintenance (including holiday gifts/bonuses.)
o Linens and linen cleaning services
o Supplies including paper towels, toilet paper, cleaning supplies, etc.
o Travel expenses to your vacation home to do maintenance (must be well documented)
o Meals while you are in your vacation home on “maintenance trips”
o Property management fees and commissions
o 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 2000 sq. ft. and you have a 200 sq.ft home-office that you use solely for your vacation rental business, then 10% of your household expenses may be tax deductible.)

Advertising expenses

o Your ads on HomeAway.com, VRBO.com, CyberRentals.com , or any other website or advertising vehicle, including any special offers, extra photos, etc.
o Business cards and other printing costs
o Website building and hosting expenses
o Photography, virtual tours, copy writing services

Capital Improvements and Amortized items

o Improvements on your home
o Furnishings and décor
o Depreciation deductions
o Tools (hammers, saws, etc.)
o Cameras, Computers, Cell phones and other equipment necessary to run your vacation rental business

Other expenses

o Checking account and credit card account administrative fees (for business purposes only)
o Postage for mailing contracts, directions, security deposits, etc.
o Legal Fees
o Delivery of your “vacation rental home town” newspaper
o Income tax preparation
o Educational expenses-- seminar attendance, and/or books about renting your vacation home

Remember things that you purchase must solely be used 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.

Items such as cameras, cell phones, computer, etc, deductions are generally deductible on a percentage of usage basis. For instance if you only use your computer for inquiries and bookings, then likely you would be able to deduct 100% of the cost of that computer, however if the computer is also a “family computer”, only a portion of the cost would be deductible.


The above is intended as a general guideline and should not be construed as tax advice. Be sure to consult your tax professional.

© Christine Karpinski 2007