Many foreign investors believe that a property’s profitability depends solely on the monthly rent. However, in practice, the factor that most impacts the bottom line is the proper handling of tax deductions under IRS rules.

If you own a property in the United States, including an Airbnb in Florida, this is a key point for understanding your actual return on investment.

How is rental income reported in the U.S.?

In general terms:

• Schedule E (Form 1040) is used to report rental income for taxpayers who are required to file as U.S. tax residents or for nonresident aliens who make an election under Internal Revenue Code section 871(d) to treat rental income as Effectively Connected Income (ECI).
• For nonresident aliens, taxation may depend on whether the income is treated as FDAP or ECI, depending on the facts and circumstances.

Deductions Allowed by the IRS

Under the “ordinary and necessary expenses” standard (Internal Revenue Code Section 162), the IRS allows deductions for expenses directly related to the operation of the property, including:

• Mortgage interest (Internal Revenue Code Section 163)
• Property taxes (subject to applicable rules such as state and local taxes, or SALT, in certain cases)
• Property insurance
• Repairs and maintenance
• Property management
• Advertising and leasing expenses
• Legal and accounting fees related to the property
• Utilities (if the owner is responsible for them)
• Travel expenses related to property management (properly documented)
• Depreciation of residential property under the Modified Accelerated Cost Recovery System, MACRS (generally 27.5 years) in accordance with Internal Revenue Code sections 167 and 168

Repairs vs. improvements (key in an IRS audit)

• ✔ Repairs: maintain the property in operating condition → generally deductible in the year
• ❌ Improvements: increase value, useful life, or capacity → must be capitalized and depreciated

Regulated under Treasury Regulation Section 1.263(a)-3.

Airbnb and short-term rentals

For Airbnb-type properties, tax treatment may vary:

• May be considered a rental activity (Schedule E) if there are no substantial services
• May be reclassified as a business activity (Schedule C or ECI treatment) if significant services are provided, depending on the facts of the case

Key points affecting actual profitability

• ✔ Deductions directly impact net taxable income
• ✔ Losses may be subject to limitations under the passive activity loss rules (Internal Revenue Code, Section 469)
• ✔ Correct classification of income (ECI vs. FDAP) can significantly change the tax treatment
• ✔ The investment structure influences overall tax efficiency

Important

The taxation of rental properties in the U.S. depends on the taxpayer’s status, the nature of the activity, and the applicable tax structure under the Internal Revenue Code. Each case must be evaluated individually.

At My Accounting Now, we help Colombian and Latin American investors properly structure their U.S. real estate holdings, optimizing their tax treatment within the IRS’s legal framework.

Call us at 786-228-8689

Email us at info@myaccountingnow.com

Do you own property in the U.S. or are you considering investing? The right tax strategy can be the difference between an average investment and a truly efficient one.

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