Hawaii is an island group in the Central Pacific renowned for its sacred land. These volcanic islands are tropical paradises with lush natural beauty and a unique, rich history. From the fertile, green valleys to the coffee plantations, each island offers a distinct, memorable experience.

As we delve into the land of short-term rentals on the Hawaiian Islands, we’ll explore everything you need to know, from the evolving rules to tax deductions.

What’s considered a short-term rental?

Short-term rentals are lodging options typically leased for fewer than 30 days, ideal for travelers seeking temporary accommodation. These rentals are commonly listed on online platforms such as Airbnb and VRBO, catering to tourists and business travelers alike.

In Maui County, transient vacation rentals accommodate stays of fewer than 180 days. These transient vacation rentals often include apartment units and single-family homes. They must be located in approved zoning areas or have obtained a conditional permit. A bed and breakfast is permitted when the guests stay in a room within the property owner’s or manager’s primary residence.

Are short-term rentals allowed in Hawaii?

In Hawaii, a new bill close to becoming law could completely change how vacation properties are regulated across the state. Hawaii is experiencing a housing crisis, especially after the wildfires Maui endured in August 2023.

This legislation would grant every county in Hawaii the authority to establish new regulations, potentially converting STRs into long-term residences. If the governor signs it, the law will start on July 1, 2024.

Anyone who breaks these rules could be fined $10,000 a day. This is significant because it’s the first time a law about short-term vacation rentals could be enacted across the entire state.

Hawaii’s housing shortage stems from the prevalence of vacation properties, which has driven up costs for locals. This new law seeks to prioritize long-term housing for residents over short-term accommodations for tourists.

How do I report rental income for my short-term rentals?

To report your earnings and pay transient accommodations taxes, use Forms TA-1 (periodic TAT return) and TA-2 (annual TAT return). Form TA-1 must be filed monthly, quarterly, or semiannually, while Form TA-2 is filed annually.

Schedule E is a U.S. form for reporting extra income and losses, covering rental real estate, royalties, and S corporations.

N-15 is Hawaii’s individual income tax form, encompassing various schedules for income, deductions, and credits, but it doesn’t target rental income as specifically as Schedule E does. Learn how to report your income taxes with a Schedule E Form. 

Follow these three steps to help break down the process.

Step 1: Gather the proper forms

Gather all the relevant financial documents, such as income statements, receipts, and expense records, needed to complete the T-1 Form accurately. This form helps vacation rental owners accurately document their rental income for tax purposes.

Step 2: Determine if the structure of your business is active or passive

Passive income is usually earned from online platforms such as Airbnb and VRBO for your vacation rental. In contrast, active income involves hands-on efforts, like providing guest services, routine cleaning, and maintenance. Earning an extra income with minimal involvement is considered a passive income.

Step 3: Reporting rental income with a Schedule E Form

Complete the Schedule E Form to report your rental income, including earnings from vacation rental properties. Vacation rental owners can provide detailed information about their rental properties, including any deductible expense incurred.

Key tax deductions for short-term rentals

Some expenses not deductible from gross rental income for tax purposes include the cost of repairs, interest expenses, management fees, utilities, property taxes, and insurance premiums. Instead of being deducted, these expenses are considered part of the gross rental income. However, landlords or short-term rental owners may qualify for some exemptions from the Transient Accommodations Tax.

FAQ: Short-term rental property tax deductions in Hawaii