If you’re a homeowner, deducting the cost of repairs or improvements to your home could yield substantial tax savings. However, whether you can deduct these expenses depends on your circumstances. Airbnb hosts can write off many items that most homeowners can’t, but it again depends on how they use the property in question. Let’s explore how Airbnb hosts can best utilize a home improvement tax deduction.
Home Improvement Tax Deductions: The Basics
Home improvement tax deductions aren’t exclusive to Airbnb hosts. Even non-renting homeowners can deduct certain home improvements on their taxes. However, the IRS treats repairs differently than capital improvements. A capital improvement is something that adds value to your home or prolongs its useful life, but we’ll go into more detail in the next section.
Some examples of potentially deductible home improvement expenses include:
- An addition
- Swimming pool or spa
- New roof
- Central air-conditioning system
- Storm windows
- Home security system
Home repairs that can create a capital gain when you sell your home are reported as ‘above the line’ deductions. As a result, they have the potential to reduce your tax bill regardless of whether you itemize. Home improvements are also above-the-line expenses for Airbnb hosts.
For more information on deductible improvements, check out IRS Publication 523. It has a complete list.
What Is a Capital Improvement?
A capital improvement that increases the value of your home, potentially increasing its resale value. Anything that increases the property’s value and makes it more attractive to guests could qualify as a capital improvement. Specifically, capital improvements increase the value of the home materially in some way. For instance, if you put in a pool, and it results in increased rentals, it’s considered a capital gain.
Home Improvement Deduction Criteria
The IRS makes a clear distinction between a repair and a capital gain. Regulations classify repairs as a necessary expenses that doesn’t necessarily increase the home’s value. For example, if you have a plumbing leak in your sink, and you call a plumber to fix it, this would be considered a repair. The home will not be any more valuable after the repair is made. Putting on a new roof is different because it increases the value of the home to potential future buyers.
Capital Improvement vs. Repairs
The IRS makes it clear that not all money you spend on your home is tax-deductible. You want to make sure that you get all the deductions that are allowed, but misclassifying an expense could make you more likely to experience an audit.
The biggest difference between a capital improvement and repair is whether it increases the value of the home. These criteria are different depending on whether you run an Airbnb or are an average homeowner without a business. Losses on sales of personal residences are not deductible, but losses on business property can be deducted in most cases.
Home Improvement Tax Deduction Rules for Rental Properties
Some people rent part of their home and live in another part, while others rent the entire home and live elsewhere. However, each situation has different tax implications. In either circumstance, you can deduct expenses that are part of normal business operations, but the deduction rules can change depending on the circumstances. Here are a few examples of expenses you can deduct if you rent the home but do not live in it.
- Hiring a cleaning company before renting
- Homeowner’s insurance
- Mortgage interest
- If you pay utilities for the rental
- Hiring a gardener or cleaning service
In some cases, you can deduct a repair as a capital gain if it’s part of a bigger renovation project. For example, if you repair your plumbing as part of a bigger project, like building an addition, it could count as a capital gain instead of a common repair. Situations like this can become tricky, and you should consult with a tax advisor to determine the correct course of action.
Home improvement Tax Deductions for Mixed-Use Properties
If you rent out part of your home as an Airbnb and live in another part, the rules change. Anything you do for your guests can be counted as a business expense. For instance, if you purchase a Netflix subscription for your guests, then you can deduct it, but you cannot deduct your personal Netflix account. If you have the same account for both, you will have to determine a percentage that goes towards the business and pro-rate your deduction accordingly.
Another example of a business expense that you can deduct includes furniture for guests and guest amenities like coffee, soap, shampoo, or other consumable items. Advertising expenses, like photography, can also be deducted. These are only a few examples. The most important concept is that you must be able to draw a line between business and personal expenses to be able to deduct them.
How to Calculate Home Improvement Deduction for Mixed Use Property
As a host, you can deduct the portion of your home that you use as a rental property. To do this, you must measure the square footage of the area used for the rental business. Don’t forget to include your home office. Once you have this number, you can divide it by the total square footage of the home. For instance, if your home is 2,000 square feet total, and your rental bedroom and office are 240 total, then your percentage would be 12%. One thing to consider is that to be able to take the deduction, you must rent your room for more than 15 days a year.
The tax rules for deducting business expenses as an Airbnb host can be confusing. At Shared Economy Tax, our tax pros specialize in taxes for Airbnb hosts, and we can show you how to maximize your business deductions without running afoul of the IRS. Contact us, to set up a one-on-one strategy session with one of our Airbnb tax experts to see how much you can save.