Kentucky, infused with southern charm, boasts unique offerings like the distinguished Kentucky Derby and the colorful city of Lexington. Lexington is also known as the world’s horse capital and is home to more than 400 horse farms. If you own a vacation home or rental unit in Kentucky, learn how to maximize your deductions.

What’s considered a short-term rental?

A short-term rental (STR) is a property leased briefly, typically lasting 30 days or fewer. Many travelers source STRs through online platforms such as Airbnb or VRBO. Regulations vary by city in Kentucky; for instance, in Louisville, STR hosts must annually register each property with the Office of Planning & Design Services.

When should I report the rental income for my short-term rental?

In the United States, the tax year kicks off on January 1 and wraps up on December 31. People are expected to file their individual tax returns on April 15 like clockwork every year.

Do I always need to report rental income?

Property owners who lease their vacation rentals for more than 14 days and earn profits on those rentals must report their rental income every year.

The 14-day rule provides an exemption for taxpayers. It applies to income earned from STRs that are leased for fewer than 14 days a year, meaning you may not need to report this income.

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

The IRS recommends using the Schedule E Form 1040 or the Form 1040-SR, which are formulated for taxpayers 65 and older in the United States.

Here, you’ll find a step-by-step guide explaining the process of reporting rental income using a Schedule E 1040 Form.

Step 1: Gather the proper forms

Create a list of all eligible deductions to include on the 1040 Form. This is where the receipts for all rental expenses linked to your vacation rental property and rental activities will come in handy.

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

To determine whether your income is active or passive, consider your involvement in your rental business. An active income stems from consistently engaging with guests and organizing services such as cleaning and maintenance.

Passive income is generated from activities in which you are not substantially involved, which include rental income or payouts from investments.

Step 3: Reporting rental income with a Schedule E (Form 1040)

When you rent out your vacation home on Airbnb, TurboTax suggests submitting a W-9 Form. If you skip this, they’ll withhold 28% of your rental income for taxes. In most cases, your actual tax owed on rental income is lower than 28%.

Here is an extensive breakdown of reporting income taxes with the 1040 Form.

Key tax deductions for short-term rentals

Tax deductions for short-term rentals in Kentucky include various expenses associated with managing and maintaining the rental property. Mortgage interest and property taxes are deductible because they are considered necessary expenses in owning the rental property. In addition to property taxes, you may be able to include insurance premiums as a deductible expense.

If you are routinely involved in the rental operations, any costs accrued from managing the rental will fall under a deductible expense. Save your receipts on repairs, travel expenses, office deductions, or relevant business expenses, including salaries for your rental property tax deductions. Scheduling a consultation with a tax professional or accountant familiar with Kentucky’s tax laws will help you navigate your first time reporting earnings.

FAQ: Short-term rental property tax deductions in Kentucky