Not tax advice
This is educational and general. Tax outcomes depend on your specific facts and change with legislation. Confirm everything with a CPA who knows short-term rentals before filing.
Short-term rentals sit in an unusual corner of the U.S. tax code. Rent a place for a month or more and you're a landlord with passive rental income. Rent it by the night with services, and the IRS may treat you like a business — which changes what you owe, what you can deduct, and even whether your losses can offset your day-job income. Understanding which bucket you're in is the whole game.
The 14-day rule (the 'Augusta rule')
The simplest rule first: if you rent your home for 14 days or fewer during the year and you personally use it as a residence, the rental income is completely tax-free and doesn't even go on your return. The trade-off is that you can't deduct rental expenses either. This is a genuine gift for people near big events — think a city hosting the World Cup — but it only works within that 14-day ceiling.
Schedule C vs. Schedule E: the central question
If you rent for more than 14 days, your income lands on one of two forms, and the difference is significant:
| Schedule E | Schedule C | |
|---|---|---|
| Treated as | Passive rental / investment income | Active trade or business |
| Self-employment tax (15.3%) | No | Yes (on net profit) |
| Typical trigger | Renting a property, standard landlord-type services | Avg. stay ≤ 7 days or 'substantial services' provided |
| Losses | Passive — usually limited | Can be active (see the loophole below) |
Most hosts want to be on Schedule E, because Schedule C income gets hit with an extra 15.3% self-employment tax. You generally end up on Schedule C when your average guest stay is 7 days or less, or when you provide hotel-like 'substantial services' — daily cleaning during the stay, meals, concierge outings, transport. Ordinary host services (Wi-Fi, a one-time clean between guests, providing linens) do not by themselves force Schedule C.
The counterintuitive part
Being on Schedule E (no SE tax) while still qualifying as a 'short-term rental' for the loophole below is often the sweet spot — but it's fact-specific. This is precisely the kind of thing to run past a CPA.
The 'short-term rental loophole'
Here's the strategy that makes STRs a favorite of high earners. Normally, rental losses are passive and can't offset your W-2 or business income unless you qualify as a full 'real estate professional' — a high bar. But a rental where the average stay is 7 days or less isn't treated as a 'rental activity' under the passive-activity rules. That means if you materially participate in running it, the losses can be non-passive and offset your active income.
Pair that with accelerated depreciation and it becomes powerful: a large paper loss in year one can shelter a chunk of your salary or business profit — without you being a real estate professional.
What 'material participation' means
You must meet one of the IRS material-participation tests — commonly 500 hours on the activity in the year, or 100+ hours and more than anyone else (which matters if you use a cleaner or co-host), or doing substantially all the work yourself. Keep a contemporaneous time log. This is the piece the IRS scrutinizes.
Cost segregation + bonus depreciation
Depreciation lets you deduct the cost of the building over time (normally 27.5 or 39 years). A cost segregation study breaks the property into components — furniture, appliances, flooring, landscaping — that depreciate over 5, 7, or 15 years instead. Combined with 100% bonus depreciation, which was restored for 2025, much of that can be deducted in year one.
Why hosts care
Advisors report that cost segregation plus bonus depreciation can produce six figures of first-year depreciation on a typical STR purchase — which, against active income for a qualifying host, can translate to tens of thousands in real tax savings the first year. The exact numbers depend entirely on price, basis, and your bracket.
Occupancy / lodging taxes
Separate from income tax, most states and many cities levy a transient occupancy tax (TOT) — also called lodging or hotel tax — on short stays. Two things trip hosts up:
- Platforms don't always collect it. Airbnb and Vrbo collect and remit occupancy tax in many jurisdictions automatically — but not all. Where they don't, you must register, collect, and remit.
- Registration is often required even when the platform collects. Some cities want you registered regardless. Check your city and county directly.
Deductions every host should track
If you're on Schedule C or E (i.e., not using the 14-day rule), ordinary and necessary expenses are deductible. Commonly missed ones:
- Cleaning and turnover — your cleaner, laundry, and supplies.
- Platform and processing fees — the host service fee adds up.
- Software — PMS, dynamic pricing, your AI concierge, accounting apps.
- Supplies and consumables — toiletries, coffee, paper goods, batteries.
- Utilities and internet — apportioned if it's a shared space.
- Repairs and maintenance — deductible now; improvements are depreciated.
- Furnishings — via depreciation or bonus depreciation.
- Mortgage interest, property tax, and insurance.
- Mileage or travel to and from the property for hosting work.
- Professional fees — your CPA, attorney, and any cost-seg study.
The habit that saves you thousands
Run every rental dollar through a dedicated bank account and card, and use STR accounting software (Baselane, Stessa, Hurdlr) to auto-categorize. Clean books are the difference between claiming every deduction and guessing in April.
The 1099-K and reporting
Platforms issue a Form 1099-K reporting your gross earnings, and the reporting thresholds have been tightening in recent years. Assume your income is reported to the IRS and reconcile the 1099-K to your own books — gross on the form includes fees you'll deduct, so it will look higher than what hit your bank.
A simple year-round tax routine
- 1Keep a dedicated account for all rental money in and out.
- 2Log your hours on the property (for material participation).
- 3Track personal-use days separately — they affect deductibility.
- 4Set aside estimated taxes quarterly so April isn't a shock.
- 5Meet your CPA before year-end, not after — most planning moves (like a cost-seg study) must happen while there's still time to act.
Software is a deductible expense — and the right stack pays for itself.
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