Wouldn’t it be nice to enjoy a few Airbnb tax benefits? Imagine all the resources that you have invested in looking for the right Airbnb property. It must have cost you blood, sweat, and tears to finally have rental property!
We believe that you should harness every available opportunity to maximize your financial gains. And one of the least noticed ways is via Airbnb depreciation. So, we will cover the following in this article:
- Defining Airbnb depreciation
- Property qualifications for an Airbnb depreciation
- Factors that determine Airbnb depreciation price
- Computation for Airbnb depreciation
What is Airbnb Depreciation?
Depreciation is an accounting process where the tax-deductible costs of a business asset are spread out over time, instead of one big-time deduction in a single year. This concept acknowledges that real estate properties lose value as they are used over the years.
So, this allows Airbnb hosts to deduct a portion of property costs from their taxes each year. The IRS sets the rules for determining the property’s useful life.
Are You Eligible for an Airbnb Depreciation?
The Internal Revenue Services sets vacation home depreciation rules. You have to meet all of the requirements below:
- Property ownership
- Income-generating nature of the property (such as short-term rentals)
- Determinable useful life (it will wear out over time)
- Expected use for more than 1 year
What are the Factors that Determine Airbnb Depreciation?
Depreciation on Airbnb property is a great way to maximize your revenue. Here are the 3 main factors that determine your tax deduction every year:
1. Identify the Basis of the Property
The basis is simply the original purchase price of the property. This includes added costs such as legal fees, closing expenses, and renovations made that may increase property value.
Land is not included in the basis since it is not depreciable. The reason is it has an unlimited useful life and does not wear out, unlike a house or a building.
2. Recovery Period
This period refers to the number of years wherein you can claim Airbnb depreciation. This is an IRS estimate on the duration of your property to “recover” its expenses through tax deductions. For residential rental properties like most Airbnbs, the IRS has set the recovery period at 27.5 years.
3. Depreciation Method
You can use the Accelerated Cost Recovery System or the same method you used in the past if you purchase and put a property in service before 1987. On the other hand, you must use the Modified Accelerated Cost Recovery System if you purchase and put the property in service after 1986.
How is Airbnb Depreciation Calculated?
The current method used for Airbnb depreciation is Modified Accelerated Cost Recovery System. This takes into account the following:
1. Recovery Class
In Airbnb depreciation, the recovery class refers to the specific category or classification that determines the applicable recovery period. Generally, real property is 39 years. But for short-term rentals like Airbnb, the recovery class is 27.5, which means the property is depreciated over 27.5 years.
2. Convention
This is the rule used to determine the timing of when the property is considered to be “placed in service.” Regardless of the actual date a rental was put into service, the mid-month convention is used for real property – including short-term rentals.
3. Placed-in-Service Date
This is simply the date when your property is ready for use. For example, you bought your property on January 1, 2022. But you only listed it on Airbnb on March 1, 2022. Then the latter day was the placed-in-service date. Therefore, it marked the beginning of the depreciation period.
4. Basis for Depreciation
As mentioned before, it includes the property’s cost eligible for depreciation. While it covers other expenses and fees, the land is not depreciated and is not included in the basis.
5. Depreciation Method
Under MACRS, the depreciation method used straight-line depreciation. This is because Airbnb depreciation has a set recovery period of 27.5 years. Straight line depreciation method accounts for the asset’s value which decreases at a constant rate over its useful life.
Once you have all the pertinent information, you can input these figures into this online MACRS depreciation calculator.
Conclusion
Taking advantage of Airbnb depreciation is a game-changer for optimizing your financial gains as an Airbnb host. By recognizing the usage of your short-term rental over time, you can claim a legitimate tax deduction. It can ultimately decrease your taxable income and increase your revenue. But as you consider Airbnb depreciation, it is still best to consult an accountant. So, they can provide you with guidance that is most applicable to your case.
As you continue your Airbnb hosting, tap into short-term rental analytics to make the most out of your investments. Check if you’re leaving money on the table from this Airbnb calculator. Secure your financial future and enjoy the rewards from your rental like never before!
