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Guide on Rental Property Tax Deductions in Illinois

Key Takeaways

  • In Illinois, the State Tax is 4.9%, and the Occupancy Tax is 5% of the listing price. Lodging and Occupancy Tax rates vary in each county.
  • Real estate investors actively managing short-term rentals (STR) will be taxed at higher rates but can benefit from deductions for repairing, advertising, cleaning, and applicable travel costs.
  • Illinois experienced unparalleled tourism in 2023, earning billions of dollars in hotel lodging.

Published on Apr 12, 2024 | Updated on Apr 18, 2024

An outline of the state of Illinois with VRBO and Airbnb location pins on it to show short-term rentals in the state.

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Illinois is home to Chicago, the Windy City, and is also known as a top summertime getaway spot, with vast rural landscapes welcoming more than 100 million tourists in 2023. If you own a primary residence in the Prairie State, discover how to maximize your rental property tax deductions and minimize tax liability. 

What’s considered a short-term rental?

A short-term rental is any property that is rented out for fewer than 30 consecutive days. You generally need to have a license to rent properties in Illinois. Check with your local municipality on licensing requirements.

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

Tax day in the United States is April 15, 2024. Property owners who actively and regularly manage vacation rentals should consult a tax professional. While Airbnb may handle tax payments in some areas, you should still diligently track guest occupancy taxes.

Review VRBO’s three options for managing your property’s lodging taxes. Some jurisdictions may require you to collect applicable taxes, while VRBO will collect other taxes. 

Do I always need to report rental income on my short-term rental?

In the United States, homeowners can rent their primary residence for up to 14 days annually without reporting the rental income on their tax return. Thus, homeowners can enjoy the rental income without having to pay taxes on it.

Even if your rental activity falls within the 14-day exemption period, Airbnb and similar platforms must still report your earnings. You can report your earnings as additional income and mark that it qualifies for the 14-day rule.

How will taxes be collected if I host my short-term rental on Airbnb?

Airbnb in Illinois collects the Hotel Operators’ Occupation Tax, which ranges between 5.98% and 6.17% of the listing price and includes cleaning fees for reservations 29 nights and shorter.

County lodging taxes may vary. For instance, the Cook County Motel Tax is only 1% of the listing price. 

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

Once your vacation property has started earning profits, it’s essential to ensure you keep a log of all rental property activity. Here are some important things to do to start preparing to file taxes. 

Step 1: Gather the proper forms

If you employ online marketplaces for renting your vacation home, such as Airbnb, use a W-9 Form to request your financial details. If you fail to use a W-9 Form, Airbnb must withhold 28% of your income. However, in many instances, your actual tax liability on your rental income will be less than 28%.

Use a Schedule E 1040 Form to report your earnings to the Internal Revenue Service (IRS).

Check out our guide on efficiently reporting rental Income with a Schedule E 1040 Form.

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

Operating vacation rental properties is generally considered a passive income, but it will not seem like passive work if you have experience as a vacation rental host. If the home is old, there’s always something to tend to, whether it’s a leak or a faulty major appliance. 

All the costs you pay for maintenance and repairs may be considered deductible expenses. On top of deductible expenses, there are depreciation deductions. In Illinois, if you claim a bonus depreciation on your federal tax return, you must add that extra amount back when calculating your state tax owed.

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

Once you determine your rental income and gather your expenses, you can use a 1040 Form to complete your taxes by providing details about each rental property.

Deduct your total expenses from your total rental income to find the net income. Always maintain thorough documentation. 

Key tax deductions for short-term rentals

As we covered previously, Airbnb will collect and remit the hotel occupancy tax. If you are acting as a property manager, you can deduct advertising costs and travel expenses to check on the property and provide services. You’re also responsible for collecting taxes and filing them. 

The Illinois state tax is 4.9%. The state’s occupancy tax is 5% of the listing price. However, each county may be subject to its own short-term rental taxes. The Illinois property tax credit gives homeowners a 5% credit on income tax returns. Those eligible must own and live in the home. If you rent a room in your home, you may be eligible to deduct property taxes, but you should check with your local municipality.

Here are some essential expenses that rental property owners may be eligible to deduct when reporting their taxable income on the residential rental property: 

  • Insurance premiums
  • Cleaning fees and applicable tax rates
  • Maintenance and repairs
  • Travel expenses

FAQ: Rental property tax deductions in Illinois

Deductible expenses may include mortgage interest, rental operating expenses, cleaning, repairs, and depreciation. You can deduct additional costs if you earn an active income from the residential rental property, and you can deduct managing expenses for conserving and maintaining your rental property.

In Illinois, it is 4.95%. However, you can use operating expenses as rental property tax deductions. Each county may have a different lodging tax.

Any earnings are considered taxable. However, if you rent your rental property for 15 days or fewer each year, you will not be taxed on those earnings. 

Our final thoughts

Owning and operating a short-term rental unit or residential property can be an ideal source of passive income. Each county has different regulations for operating single-family homes and rental units. Whether you are considering renting your home for long-term use or as a vacation rental, discover all of the essential rental documents you will need to manage a property.

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