Short-term rental income is taxed as ordinary income on your federal return, with one clean exception: rent your home for 14 days or fewer in a year and you owe nothing and report nothing. Above that threshold, how your short-term rental income is taxed depends on whether the IRS treats the activity as a passive rental or an active business, and that classification decides whether you pay self-employment tax, whether losses can offset your other income, whether the 20% qualified business income deduction is available, and whether an extra 3.8% surtax applies.
The 14-Day Tax-Free Rule
Under Section 280A(g) of the Internal Revenue Code, you can rent a primary or secondary home for up to 14 days in a calendar year and owe zero federal tax on the income, no matter how much you collect.1Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc You don’t report the money and you don’t file any rental schedules. Homeowners in cities that host events like the Super Bowl, the Masters, or large festivals can collect substantial sums during those two weeks tax-free.
To qualify, you must also use the home as a personal residence for the greater of 14 days or 10% of the days it’s rented at fair market value during the year.1Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc The tradeoff: you can’t deduct any rental expenses either. The income is invisible to the IRS, and so are your costs.2Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property
Days spent doing full-time repairs and maintenance don’t count as personal-use days, even if family is at the property at the same time, as long as the primary purpose of the trip is the repair work.3Internal Revenue Service. Publication 527, Residential Rental Property
Schedule E or Schedule C
Once you cross the 14-day line, every dollar of rental income is taxable and the IRS needs the activity classified. Most short-term rentals belong on Schedule E of Form 1040, which covers passive rental income.4Internal Revenue Service. Topic No. 414, Rental Income and Expenses You file Schedule E if you provide basic amenities such as furnishings, Wi-Fi, linens, and cleaning between guests, but nothing that resembles hotel service. Income reported on Schedule E is not subject to self-employment tax.
The classification shifts to Schedule C when you provide what the IRS calls “substantial services” primarily for guests’ convenience.4Internal Revenue Service. Topic No. 414, Rental Income and Expenses Daily housekeeping during a stay, fresh towels on demand, prepared meals, or guided experiences push you into that territory. Once you’re on Schedule C the IRS treats you as running a business, and that triggers self-employment tax at 15.3%, which covers Social Security (12.4%) and Medicare (2.9%).5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) That tax sits on top of your regular income tax. You can deduct half of the self-employment tax on Schedule 1 as an adjustment to income, but the combined 15.3% still applies to earnings up to the Social Security wage base, and the 2.9% Medicare portion has no cap.
Getting this classification wrong is expensive in both directions. Filing Schedule C when Schedule E was appropriate costs unnecessary self-employment tax. Filing Schedule E when you’re actually running a hotel-style operation can produce penalties and back taxes.
The 7-Day Rule and Whether You Can Deduct Losses
Under the passive activity rules, rental activities are generally passive by default, which means losses can’t offset your salary or other active earnings. Short-term rentals often escape that rule. If the average guest stay is 7 days or less, the IRS does not treat the activity as a “rental activity” for passive loss purposes.6Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules
You calculate the average by dividing total rental days by the number of separate rental periods during the year. Forty bookings totaling 200 rental days averages 5 days per stay, comfortably under the threshold. Most hosts renting by the night qualify.
Once your rental sheds the rental-activity label, it’s treated as an ordinary trade or business for passive loss purposes. If you also materially participate, losses become fully deductible against your other income with no passive-loss cap. Material participation generally means more than 500 hours a year on the activity, though you can also qualify by working at least 100 hours if that’s more than any other individual involved.6Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules For self-managing hosts handling communications, cleaning coordination, and maintenance, 500 hours across a year is achievable.
If your average stay runs longer than 7 days, the rental stays passive and losses are generally trapped. A special allowance lets you deduct up to $25,000 in rental real estate losses against non-passive income if you actively participate, but the allowance phases out as modified adjusted gross income rises above $100,000 and disappears at $150,000.6Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules Unused losses carry forward.
What You Can Deduct Against Rental Income
Every legitimate deduction reduces the income the IRS taxes. Allowed expenses include advertising, cleaning and maintenance, insurance, mortgage interest, property taxes, management fees, legal fees, utilities, and supplies. Rent your whole property year-round and you deduct these in full. Rent only part of the property, or use it personally for part of the year, and you have to allocate. The IRS accepts any reasonable method; dividing by number of rooms or square footage are the common approaches, with a further proration by rental days versus personal days for mixed-use property.3Internal Revenue Service. Publication 527, Residential Rental Property
Repairs are deducted immediately. Improvements have to be capitalized and depreciated. Fixing a broken faucet is a repair; renovating the kitchen is an improvement. A de minimis safe harbor lets you deduct items costing $2,500 or less per invoice as expenses rather than capitalizing them, elected annually on your return.
Driving to the property to manage check-ins, meet contractors, or handle maintenance is deductible. For 2026, the standard business mileage rate is 72.5 cents per mile.7Internal Revenue Service. 2026 Standard Mileage Rates Overnight trips can produce deductions for lodging, meals (subject to limits), and transportation when the primary purpose is managing the rental rather than personal travel.8Internal Revenue Service. Publication 463, Travel, Gift, and Car Expenses
Depreciation
Depreciation is usually the single largest deduction on a rental, and it produces real tax savings without additional cash outlay. Residential rental buildings are depreciated over 27.5 years using the straight-line method.9Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System You depreciate only the building, not the land, so you have to determine what portion of your purchase price is attributable to the structure. County property tax assessments give a reasonable starting point. For mixed-use property, you depreciate only the rental-use percentage.
Depreciation isn’t free. When you sell, the IRS recaptures the depreciation you claimed (or should have claimed) and taxes it at up to 25%. In most cases the time value of the deductions today still outweighs the recapture years later.
The 20% Qualified Business Income Deduction
Section 199A lets eligible taxpayers deduct up to 20% of qualified business income from pass-through entities, including sole proprietorships.10Internal Revenue Service. Qualified Business Income Deduction The deduction has been made permanent. For a rental to qualify, it must rise to the level of a trade or business. A safe harbor treats a rental as a qualifying business for QBI purposes if you perform at least 250 hours of rental services per year and maintain separate books and records; for properties in existence at least four years, the 250-hour test applies to any three of the preceding five tax years.11Internal Revenue Service. Safe Harbor for Rental Real Estate Enterprise Under Section 199A Rental services include advertising, negotiating leases, verifying applications, collecting rent, managing the property, and overseeing repairs. Short-term rentals with high turnover and active management often clear the Section 162 trade-or-business bar even without the safe harbor. The deduction is capped at the lesser of 20% of QBI or 20% of taxable income minus net capital gains, with additional wage-and-property limitations at higher income levels.
The 3.8% Surtax for Higher Earners
High-earning rental owners face an additional 3.8% tax on net investment income under Section 1411, commonly called the NIIT. It applies when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married joint filers, and rental income is specifically included in net investment income.12Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
The 7-day rule matters here too. If your short-term rental is classified as a non-passive trade or business because the average stay is 7 days or less and you materially participate, the NIIT generally does not apply to that income. For owners above the income thresholds, structuring the activity as non-passive can save thousands.
Form 1099-K and What the Platform Reports
Payments received through Airbnb, Vrbo, or similar platforms are reported to the IRS on Form 1099-K when gross payments exceed $20,000 and you have more than 200 transactions during the year.13Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill
The gross figure in Box 1a is not your taxable income. It includes platform service fees, refunds, and credits you never actually received.14Internal Revenue Service. What to Do With Form 1099-K Deduct those amounts when preparing your return so you’re taxed only on what you kept. Failing to reconcile the 1099-K against actual deposits is a common mistake and reliably produces overpayment. Keep records of every fee and guest refund.
Falling below the 1099-K threshold doesn’t erase the tax. The reporting threshold controls what the platform tells the IRS, not what you owe.
Quarterly Estimated Payments
Rental income doesn’t have taxes withheld the way a paycheck does. If you expect to owe $1,000 or more after subtracting withholding and refundable credits, you’re required to make quarterly estimated payments to avoid an underpayment penalty.15Internal Revenue Service. Estimated Tax Payments are due April 15, June 15, September 15, and January 15 of the following year.
You avoid the penalty entirely if your payments cover at least 90% of your current-year tax or 100% of the tax shown on your prior-year return (110% if your AGI exceeded $150,000).15Internal Revenue Service. Estimated Tax For first-year rental owners, the prior-year safe harbor is usually the simpler path: if W-2 withholding covered last year’s tax, you won’t face a penalty this year, though the April bill will be larger.
State and Local Lodging Taxes
Federal income tax isn’t the whole picture. Most jurisdictions impose occupancy or lodging taxes on the rent you collect. Combined state and local rates range from a few percent to over 15% and go by various names: hotel tax, transient occupancy tax, tourism tax, or lodging tax.
Many platforms now collect and remit these taxes automatically under agreements with local authorities, showing the tax as a separate line item on the guest’s charge. Where the platform doesn’t, collecting and remitting is on you, and local governments have grown aggressive about enforcement. Some jurisdictions require a lodging tax permit before your first guest arrives, and unpaid taxes tend to accrue interest and percentage-based penalties quickly. Check the local rules before your first booking goes live.