As the need for short term rental accommodations continues to increase, it’s important to understand how you can benefit not just as a potential business owner but also in terms of taxes. Short-term rentals offer many advantages when compared to traditional long-term leases such as higher revenue potential, more flexible scheduling and often fewer overhead costs. Additionally, they may also provide significant tax savings related to income from these properties. In this blog post we’ll explore the various ways in which you can save money through tax deductions associated with running your own short-term rental property. Whether you’re looking for a side hustle or new source of passive income – understanding these elements will help ensure that your financial returns are maximized while reducing some of the stress and risks associated with an unfamiliar venture.

What is a Short-Term Rental Property and How Does it Work?

Imagine you’ve got a vacation planned for the upcoming weekend but can’t seem to find an affordable place to stay. Enter short-term rental properties! These types of rentals can be found on websites like Airbnb, VRBO, and HomeAway. Essentially, short-term rentals are properties that are available for rent on a short-term basis, usually for less than 30 days but definitely less than a year. These properties range from cozy apartments to giant mansions, and can be rented out for various different reasons including vacations, business trips, or even just a weekend getaway. To book a short-term rental property, all you have to do is search for your desired location and filter by date and price using one of the many platforms that cater to short term rentals. Then, once you’ve found the perfect spot, you can communicate with the property owner and book your stay. It’s that simple!

Benefits of Investing in Short-Term Rentals,

Investing in short-term rentals can be a lucrative venture for those looking to boost their income and diversify their investments. With the rise of platforms like Airbnb and VRBO, more and more travelers are opting to stay in short-term rental properties over traditional hotels. This presents a prime opportunity for investors to capitalize on the growing demand and earn substantial profits through rental yields. Additionally, short-term rentals offer greater flexibility and control over property usage, allowing for seasonal renting and the ability to use the property for personal purposes when it’s not being rented out. Overall, investing in short-term rentals has the potential to provide a multitude of benefits for those willing to take the plunge.

Tax Advantages of Investing in Short-Term Rentals

Investing in short-term rentals can bring in many financial benefits, including tax advantages. One of the main advantages is the short term rental loophole.  This loophole has saved investors thousands of dollars in taxes because it doesn’t require you to be a real estate professional.  You can read the IRC code here.  There are 6 ways that income from a rental property can be excluded from the definition of a rental activity, and thus not be considered passive income.  They are:

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. This could include services like a hotel would provide, such as daily cleaning or meals.
3. Extraordinary personal services (same as above) 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 non rental activity of the taxpayer.
5. The taxpayer customarily makes the property available during defined business hours for nonexclusive use by various customers.
6. 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.

Becoming classified as a real estate professional is one way to turn losses on rental property and thus passive losses into tax savings.  Typically for a fully employed person this isn’t possible due to the IRS definition of a real estate professional.  Short-term real estate investors are able to turn rental property losses to non-passive income if they meet one of seven material participation criteria.  These tests determine whether you qualify based on your use of and involvement in your short term rental property.  They are:

1. Spend more than 500 hours on the short term rental business
2. Do substantially everything for the STR business
3. Spend more than 100 hours on the activity and no one other individual spends more time than you do
4. Significant participation activity for more than 100 hours, and your combined activity in all significant participation activities exceeds 500 hours
5. Participating in the business for five of the 10 previous taxable years
6. Personal service activity (non income-producing) for three of the previous taxable years
7. Regular, continuous, provable participation in the business for more than 100 hours

The first three are the ones the majority of short term real estate investors qualify for. The goal of meeting these requirements is to use your short term rental for non-passive losses.  These non-passive losses can offset your other non-passive income.  

Most short term rentals are pretty much break even at best.  Once you figure in the depreciation expense associated with the investment that generally swings them to a loss, especially if you do a segregation study and take advantage of bonus depreciation.  Which can easily add 20%-30% of the cost of the property to depreciation expense.  Bonus depreciation is currently being phased out by the IRS and  by 2027 will no longer be available.  This loss is then eligible to be used to reduce your other non-passive income.  

Rules and Regulations for Short-Term Rental Properties

As the popularity of short-term rental properties continues to grow, it becomes increasingly important for property owners to familiarize themselves with the necessary rules and regulations surrounding these types of rentals. From obtaining the proper permits to adhering to local safety codes, there are a variety of guidelines that must be followed to ensure a successful and stress-free rental experience. While navigating these regulations may seem daunting, with the right guidance and attention to detail, property owners can operate their rental properties with confidence and ease. So if you’re considering entering the world of short-term rentals, take the time to educate yourself on the necessary rules and regulations, and set yourself up for success.

Strategies for Maximizing Profits with Short-Term Rentals

The short-term rental market is becoming increasingly popular, and for good reason. With the right strategies in place, it can be a lucrative source of income for property owners. Maximizing profits requires a combination of smart pricing, marketing, and management. First, consider charging higher rates during peak seasons and events. Additionally, photos and a detailed description of your property can help attract more guests. Investing in guest amenities and prompt customer service will also pay off. It’s important to keep an eye on your expenses and adjust your pricing accordingly to ensure that you are not losing money. Finally, always aim for a high level of guest satisfaction and encourage positive reviews, which can lead to repeat bookings and increased revenue. By implementing these strategies, you can unlock the full potential of your short-term rental property.

Tips for Finding the Perfect Short-Term Rental Property

When it comes to finding the perfect short-term rental property, there are a few important tips to keep in mind. First and foremost, it’s essential to prioritize your must-haves when it comes to location, amenities, and overall budget. From there, you can start doing your research by scouring online rental marketplaces and reading reviews from past guests. Another pro tip is to make direct contact with the property owner or manager to get a better sense of the property and any additional perks that might not be advertised online. As you narrow down your options, be sure to ask about any potential hidden fees or restrictions so that there are no surprises when it comes time to make your final decision. With a little bit of effort and attention to detail, you’ll be able to find the perfect short-term rental property that checks all of your boxes.

Short-term rental properties can provide an efficient and dynamic investment opportunity for those looking to turn a profit or simply supplement their income. With the promise of increased profits, potential tax advantages and a variety of strategies for maximizing returns, it is no wonder that short-term rental investments are becoming increasingly popular. However, it is important to understand the rules and regulations that govern short-term rental properties so that you do not get caught up in any legal quandaries. Ultimately, by taking the time to research short-term rental opportunities now, you may even be able to capitalize on early market trends with just the right investment strategy. So if investing in a short-term rental property sounds like a good fit for your current goals, now may be the time to start scouting out this potentially lucrative option. If you would like to explore the tax benefits of these investments further, please reach out!