When running a vacation rental, one important question is what kinds of expenses arise and how to properly record them.

Correctly recording expenses reduces your tax burden and allows you to manage your income efficiently. For properties where the host lives on-site, it’s possible to allocate a portion of costs like utility bills and rent as business expenses.

In this article, we’ll break down the expenses involved in running a vacation rental business. This is a must-read for anyone filing their first tax return or getting ready to launch a vacation rental venture.

What Counts as a Business Expense?

A business expense refers to the various costs involved in running a business. For vacation rentals, this includes things like rent, utility bills, and the cost of furniture and equipment. Properly recording these expenses can help lower your taxable income.

Major Expenses in Vacation Rental Management

1. Rent

Rent is typically the single largest expense in running a vacation rental business. If you’re leasing a property to operate your rental, you’ll need to declare rent as a fixed monthly cost. For host-occupied properties, you can allocate a portion of the rent as a business expense based on the ratio of space used by the host versus the space used by guests.

2. Property Management Fees

If you outsource your vacation rental operations to a management company, you’ll incur management fees. These typically cover services like property sourcing, contract handling, and guest acquisition support, and can be recorded as a business expense. Since fees are often charged per property contract or confirmed booking, it’s important to factor them into your overall operating costs.

3. Utility Costs

Water, electricity, and gas used by guests are costs borne by the host. Electricity bills tend to spike in particular during the summer and winter months due to increased air conditioner use. Installing energy-efficient air conditioners and LED lighting can help reduce costs over the long term. For host-occupied properties, these costs can be allocated proportionally based on the number of nights guests stay and their actual usage, then recorded as a business expense.

4. Property Tax and Other Taxes

Property tax is levied annually on real estate you own, with the amount varying based on the property’s assessed value. For the portion of your home used for vacation rental purposes, you can allocate and record the corresponding tax as a business expense based on the floor area used for that purpose. There are also other taxes to consider, such as real estate acquisition tax and city planning tax, so be sure to check thoroughly to avoid any oversights.

5. Communication Costs

A stable internet connection is essential these days. Communication costs include the monthly fee for your internet service and the cost of purchasing a router. It’s also worth considering streaming services like Netflix and Amazon Prime, smart home devices, and security systems to enhance the guest experience.

6. Furniture and Supplies

Interior design plays a major role in a guest’s decision to book your property. The cost of purchasing furniture and interior items needed to run your vacation rental can be recorded as a business expense. Investing in quality design can boost guest satisfaction and encourage repeat bookings. Even though it involves ongoing costs, make sure to regularly restock consumables and maintain or replace furniture as needed.

7. OTA Commission Fees

Using online travel agencies (OTAs) like Airbnb and Booking.com can significantly boost your guest acquisition. In exchange, a commission fee is charged whenever a booking is confirmed, which becomes part of your operating costs. Be sure to keep the fee statements for each booking, as they’ll serve as important records when declaring these expenses.

Tax Classification of Vacation Rental Income

Vacation rental income falls into different income categories depending on how the business is operated. Understanding each of these categories is key to filing your taxes correctly.

1. Business Income

If you’re running your vacation rental as your primary occupation, the income is classified as “business income.” This refers to income an individual earns through ongoing business activities, and applies when the rental is operated on a continuous basis. When filing as business income, choosing the blue return (aoiro shinkoku) filing method lets you claim a deduction of up to 650,000 yen, plus the added benefit of being able to carry forward losses to future years. Be sure to consult a tax professional, such as a certified tax accountant, for guidance on the appropriate filing method.

2. Real Estate Income

If you’re earning income by leasing out real estate, your vacation rental income is classified as “real estate income.” This category covers income earned from renting out land or buildings, and it often applies to vacation rentals that involve frequent short-term stays. Real estate income can be combined with other income sources and declared as part of your total income.

3. Miscellaneous Income

If you’re running your vacation rental as a side business, it’s classified as “miscellaneous income.” This category covers income that doesn’t fit into the main income classifications, and it’s taxed on the amount remaining after deducting necessary expenses. Even when filing as miscellaneous income, be sure to keep detailed expense records and retain all necessary documentation.

How Tax Filing Differs Between Side Business and Full-Time Vacation Rental Operations

When it comes to vacation rentals, whether you need to file a tax return depends on whether it’s your primary occupation or a side business. Let’s take a closer look at the filing requirements for each case.

1. Running a Vacation Rental as a Side Business

If you’re running a vacation rental as a side business, whether you need to file a tax return depends on your annual rental income. A tax return is required if your annual vacation rental income exceeds 200,000 yen. When filing, the taxable amount is calculated after deducting eligible expenses.

2. Running a Vacation Rental as Your Main Occupation

If your vacation rental is your primary occupation, filing a tax return is mandatory once your annual income exceeds 200,000 yen. Since properly deducting expenses from your income can reduce your taxable income, be sure to keep a thorough record of all deductible expenses and avoid any omissions in your filing.

Conclusion

Running a vacation rental involves a variety of expenses, and it’s essential to keep accurate track of them all. Since filing requirements differ depending on whether it’s a side business or your main occupation, be sure to file under the income category that matches your specific operating style. By filing accurately and reducing your tax burden, you can keep your vacation rental business running smoothly.