Is Your Vacation Rental Considered Commercial Real Estate?

If you own a vacation rental property, it’s important to understand whether it counts as a commercial real estate property. Recently, the IRS added an exception for short-term vacations that could help lower your tax obligation. What do you need to know?

What Determines If Your Vacation Rental Is Commercial Real Estate

If you have a short-term vacation rental that is always rented for 30 days or less at a time, the IRS considers it a nonresidential property that will have a 39-year depreciation period instead of the 27.5-year depreciation period offered to residential real estate properties. As an important difference, however, your property will not qualify for the same energy deductions that a home would, as all properties that provide lodging are excluded. Our accountant can help you determine the best ways to still limit costs at your commercial real estate property.

Is Your Property Residential or Nonresidential?

The IRS considers vacation rentals to be residential real estate, so most accountants will use the 27.5-year depreciation period when calculating tax liabilities. However, Section 168(e)(2) offers an alternative for vacation rentals that are leased for 30 days or less at a time. This piece of the regulations considers these properties a type of commercial real estate so that you can take advantage of the longer 39-year depreciation period. Instead of being viewed as a home, they are viewed similarly to hotels and other hospitality industry properties.

When calculating your liability, you will need to consider the type of rentals and occupational statuses that the property has. For example, you rent your beach house for one-week periods for 12 weeks over the course of the summer. That would add up to 84 days of commercial real estate use and no days of residential usage. So for that period, over 50% of the days of use are transient, so it would be considered commercial real estate. We can help you determine what type of property your vacation home is and also ensure that you receive the maximum amount of deductions possible.

Make Finances Easy at Your Commercial Real Estate Business with MKS&H

MKS&H provides tax and accounting services to businesses of every size and in every industry, including construction and commercial real estate. We can work with you to improve your company and make sure that it is financially secure now and in the future. Contact us today for a consultation.

About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.

Like what you read? Sign-up for our C-Suite Spotlight Program.