Short-term rental taxes work like this: the income is fully taxable at the federal level, and most hosts also owe state or local lodging taxes on every booking. The only clean escape is the 14-day rule. Rent your home fewer than 15 days in the year and the income is tax-free and doesn’t go on your return. Cross that line and everything you earn is reportable, with the specifics depending on how the IRS classifies your activity and what services you provide to guests.
The 14-Day Exclusion
Section 280A(g) of the Internal Revenue Code lets you rent a personal residence for up to 14 days a year without reporting a dollar of the income. It’s sometimes called the Masters Rule because homeowners near major sporting events use it to collect a week or two of premium rents tax-free.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 trade-off is that you get no deductions for those rental days. No cleaning costs, no depreciation, no allocated mortgage interest. The property must also qualify as your residence, meaning your personal use exceeds the greater of 14 days or 10% of the days it’s rented at fair market value.2Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property If you rent 15 days or more, this exclusion is off the table and normal reporting rules apply to the full year.
Schedule E or Schedule C
Once your activity is reportable, the first question is which form you file. Most short-term rental hosts use Schedule E of Form 1040, the default for rental real estate. Income is treated as passive: you list gross rents, subtract expenses, and report the net. Because it’s passive, rental losses generally can’t offset wages or other active income, which matters if you’re running at a paper loss in your early years.3Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040)
Providing significant guest services moves you to Schedule C. The Schedule E instructions draw the line at ordinary property services versus hospitality: furnishing heat, cleaning common areas, and collecting trash keep you on Schedule E. Maid service, daily housekeeping, prepared meals, or organized activities push the activity onto Schedule C as a business.3Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040) The difference isn’t cosmetic. Schedule C income carries self-employment tax; Schedule E income does not.
Self-Employment Tax When You Provide Services
If your income lands on Schedule C, you owe self-employment tax on the net profit at a combined 15.3% rate: 12.4% for Social Security and 2.9% for Medicare. You’re paying both the employer and employee shares. Half of the self-employment tax is deductible as an adjustment to income on your return.
IRC Section 1402 generally excludes rental income from self-employment tax, but the exclusion falls away when rentals are received in the course of a trade or business, which is exactly what a hospitality operation is.4Office of the Law Revision Counsel. 26 USC 1402 – Definitions Hand guests a key and leave them alone and you’re almost certainly outside SE tax. Change linens, stock the fridge, and greet at check-in and you should plan on paying it.
The Short-Term Rental Loophole
Under the passive activity loss rules, rental activities are automatically passive, so losses can only offset other passive income. That blocks the tax benefit many hosts are chasing when they run properties at a paper loss through depreciation.
The exception is well known among tax planners. When the average guest stay is seven days or less, the IRS stops treating the activity as a rental for passive loss purposes. It looks more like a regular business. If you also materially participate, losses can offset wages, business income, and other non-passive earnings. This is the short-term rental loophole, and it’s why some high-income investors prefer short-term to long-term rentals.
Material participation means you personally put substantial time into the activity. The most-cited benchmark is more than 500 hours per year, though the IRS accepts several other tests, including spending more than 100 hours when no one else spends more, or having materially participated in five of the previous ten years.5Internal Revenue Service. Passive Activity and At-Risk Rules Keep a contemporaneous time log. The IRS challenges material participation claims during audits, and reconstructing hours after the fact is a weak defense.
Deductions That Reduce What You Owe
Ordinary and necessary expenses tied to the rental are deductible: mortgage interest, property taxes, insurance, utilities, maintenance, and depreciation.2Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property If you also use the property personally, allocate each expense by the ratio of rental days to total use days. Only the rental portion is deductible.
What Counts as Personal Use
Personal use days drive the allocation and can affect whether the property qualifies as a residence. The IRS counts as personal use any day you or a family member uses it, any day someone uses it under a home-swap arrangement, and any day it’s rented below fair market value.2Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property Days spent solely on maintenance and repairs don’t count, even if you stay overnight.
Depreciation, Bonus Depreciation, and Section 179
Depreciation is usually the largest single deduction. Residential rental buildings depreciate over 27.5 years under MACRS, so you deduct a fraction of the building’s cost, excluding land, each year.6Internal Revenue Service. Publication 946, How To Depreciate Property
For qualifying personal property inside the rental, like furniture, appliances, and certain improvements, the timing is better. The One Big Beautiful Bill Act reinstated 100% bonus depreciation for property placed in service after January 19, 2025, letting you write off the full cost in year one instead of over several years.7Internal Revenue Service. One, Big, Beautiful Bill Provisions Section 179 offers a similar immediate write-off for qualifying assets, with a 2026 deduction limit of $2,560,000. Most hosts won’t come close to that ceiling, but the ability to expense furnishings in year one can significantly reduce the first-year bill.
A cost segregation study can go further, reclassifying components of the building itself, such as flooring, cabinetry, and landscaping, into shorter recovery periods. These studies cost money and generally only pencil out on higher-value properties, but for owners pursuing the short-term rental loophole, accelerated depreciation is what actually creates the usable losses.
Mileage
Driving to the property for cleaning, guest turnover, maintenance, or supply runs produces deductible mileage. The 2026 IRS standard business mileage rate is 72.5 cents per mile.8Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents You can use this flat rate or track actual vehicle expenses, but to preserve the option to switch later, you must use the standard rate in the first year the vehicle is used for business. Keep a log with dates, destinations, and business purpose.
What Happens When You Sell
Depreciation deductions come with a bill at the back end. When you sell, the IRS recaptures depreciation whether or not you actually claimed it. Recaptured depreciation is taxed at a maximum federal rate of 25%. Any remaining gain above the depreciated amount is taxed at the long-term capital gains rate, which tops out at 20% for higher earners.
That’s the hidden cost of aggressive depreciation. A host who leaned on cost segregation and bonus depreciation to build big early deductions faces a correspondingly larger recapture at sale. A 1031 like-kind exchange can defer both capital gains and recapture by rolling the proceeds into another investment property, but the obligation follows the replacement property rather than disappearing.
Net Investment Income Tax
Higher earners owe an additional 3.8% net investment income tax on rental income when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. NIIT applies to the lesser of net investment income or the amount by which income exceeds the threshold.9Internal Revenue Service. Net Investment Income Tax
If your rental qualifies as a non-passive trade or business, because the average stay is seven days or less and you materially participate, the income may fall outside NIIT. That’s another reason the short-term rental loophole draws high-income taxpayers: it can knock out both the passive loss limitation and the 3.8% surtax at the same time.
The Qualified Business Income Deduction
Section 199A allows a deduction of up to 20% of qualified business income from pass-through entities, and rental income on either Schedule C or Schedule E can qualify. Below the applicable income threshold, the full 20% is available without extra limits. Above the threshold, the deduction phases down based on W-2 wages paid and the depreciable basis of business property.
Whether a rental counts as a trade or business for QBI has been the recurring question. Revenue Procedure 2019-38 gave a safe harbor: separate books, at least 250 hours of rental services logged per year, and contemporaneous records. Active short-term rental hosts generally clear this bar. The QBI deduction was scheduled to sunset after 2025 under the original Tax Cuts and Jobs Act, but the One Big Beautiful Bill Act extended it. The IRS is still finalizing 2026 thresholds.
State and Local Occupancy Taxes
Nearly every state and most municipalities impose a lodging or occupancy tax on short-term rentals. State-level rates vary widely, from under 2% in some states to 15% in Connecticut, and many cities and counties add their own on top. Combined burdens of 15% or more of the nightly rate are common. Guests pay the tax at booking, but the legal duty to collect and remit rests with you.
Major booking platforms handle collection and remittance in many jurisdictions, deducting the tax from the guest payment before it reaches you. Coverage isn’t universal. Where the platform doesn’t collect, you register with local tax authorities, file returns on their schedule, and pay the tax yourself. Missing remittance can trigger penalties, back-tax assessments, and revocation of your short-term rental permit.
Many cities also require a separate business license or short-term rental permit, often with registration, safety inspection, liability insurance, and an annual fee. Permit and license costs are deductible as ordinary business expenses.
Quarterly Estimated Payments
Rental income isn’t subject to withholding, so the IRS expects quarterly estimated payments. If you’ll owe $1,000 or more after withholding and credits, you avoid an underpayment penalty by hitting one of the safe harbors: paying at least 90% of the current year’s liability, or paying 100% of the prior year’s tax, rising to 110% if your prior-year adjusted gross income exceeded $150,000.10Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
The quarterly deadlines:
- April 15, covering January through March
- June 15, covering April and May
- September 15, covering June through August
- January 15 of the following year, covering September through December
If a due date falls on a weekend or holiday, it shifts to the next business day.11Internal Revenue Service. Estimated Tax Because rental income is seasonal for most hosts, basing estimates on prior-year tax is often simpler than projecting each quarter.
Reporting and Recordkeeping
Booking platforms must send a Form 1099-K when your total payments exceed $20,000 across more than 200 transactions. Some issue 1099-Ks at lower amounts voluntarily.12Internal Revenue Service. Understanding Your Form 1099-K Getting a 1099-K doesn’t change your obligation. All rental income is reportable whether or not a form arrives.
On Schedule E, you’ll enter the property address, fair rental days, personal use days, gross rents, and expenses by category. On Schedule C, you follow the standard business profit-and-loss format. Either way, accurate allocation between rental and personal use days is the foundation of the whole return.
Keep records as long as they’re needed to support the return. For rental property, that means holding depreciation records, purchase documents, and improvement receipts for the entire time you own the property plus at least three years after you file the return for the year you sell.13Internal Revenue Service. Recordkeeping For recurring expenses like cleaning, supplies, and repairs, keep receipts for at least four years after filing. When you eventually sell, organized records are the only way to reconstruct depreciation basis accurately, and they’re the practical defense in an audit.