5 Tax Changes for Short-term Rental Hosts
The Tax Cuts and Jobs Act has important changes that may impact your vacation rental property. Are you a short-term rental host? If you use an online rental service like Airbnb, HomeAway, or VRBO to rent out your vacation home you might want to take a look at these tax changes.
Pass-thru Deduction for Trade or Business Activities
Short-term Rental Hosts can be eligible to deduct up to 20% of their qualified business income from their income taxes. This is on top of all your other rental related deductions. How much you’ll be able to deduct depends on your taxable income and how much you earn through rental activity. High earners are limited to a 2.5% deduction of the cost of their rental plus 25% of amounts paid to employees (which short term hosts usually don’t have to worry about)
Updating appliances or buying new furniture for your rental property? You can write-off these as a rental expense. TCJA makes this easier than ever before. Short term hosts (for 2018-2022) will be able to use 100% bonus depreciation to write-off the full cost of long-term personal property they use for their rental business. Bonus depreciation can now be used on new and used personal property, but not real property.
Hosts can use this popular tax break to deduct, in one year, up to $1 million of personal property purchased to furnish lodging. Bear in mind that Section 179 may only be used for property that is used for renting at least 50% of the time.
New Limits on Property Tax and Mortgage Interest Deductions
Prior to the new TCJA, individuals could deduct interest on up to $1 million of acquisition indebtedness. The TCJA reduces this to $750,000. Also, the itemized personal deduction for real property taxes is capped at $10,000 for the portion allocated to personal use of the property. The portion allocated to rental property is not limited.
Hobby Expenses Are No Longer Deductible
Hobby expenses have been completely removed from TCJA. Therefore, the income from a rental activity classified as a hobby must be reported and tax paid, and no expenses may be deducted. Most rental activities qualify as businesses or investment activities. Rentals that are not profit-motivated are required to be classified as hobbies. So it’s time to turn a profit!
Lower Income Taxes on Rental Profits
Nearly all short-term hosts pay income tax on their rental profits at their individual tax rates, but the TCJA has reduced individual income tax rates for nearly all taxpayers. So it’s likely that you’ll pay less tax on your profits going forward.
Mostly positive changes for the short-term rental hosts under the new TCJA. Make sure you read up on your requirements before you book renters this summer. Contact Profit Wise today, if you need further assistance navigating the changes. We are here to help! 256.489.1478 or schedule an appointment now.