Vacation Rental Tax Rules: 14-Day Rule, Deductions, and Selling

Vacation rental tax rules start with a single federal threshold: if you rent your property for fewer than 15 days in a year, the income is tax-free and unreportable; at 15 days or more, every dollar becomes taxable, reported on Schedule E of your Form 1040, and usually subject to state or local occupancy taxes as well. Deductions can offset most of the federal bite, but the rules for what you can deduct, when losses are usable, and what happens at sale all depend on how you use the property and how much of it is rental.

The 14-Day Tax-Free Rule

Under 26 U.S.C. § 280A(g), if you use a dwelling as a personal residence and rent it for fewer than 15 days during the year, none of that rental income counts as gross income. You don’t report it and you don’t owe tax on it.¹

Two conditions must both be true. The property qualifies as your residence for tax purposes, meaning you use it personally for more than 14 days during the year or more than 10% of the days it’s rented at fair value, whichever is greater. And total rental days stay below 15. Most owners who only rent occasionally clear the personal-use side without effort.¹

The trade-off is that no deductions are available against those rental days either. Cleaning fees, advertising, supplies for guests — none of it is deductible when the income itself isn’t taxable.²

Federal Income Tax Once You Cross 15 Days

At 15 rental days or more, everything you collect for the use of the property is reportable income. That includes nightly rent, cleaning fees charged to guests, and any other payments received in connection with the stay.³

Most vacation rental income is passive income reported on Schedule E of Form 1040. It flows into your return and is taxed at ordinary federal rates, currently 10% to 37% depending on your total taxable income.⁴

Personal use controls how much you can deduct. If you use the home personally for more than 14 days or more than 10% of rental days (whichever is greater), the IRS treats it as a residence and caps deductions at the amount of rental income. You can zero out the income but can’t create a net loss to shelter wages or other earnings. If personal use stays below that threshold, the property is treated as a pure rental, and losses become potentially usable against other income under the passive-loss rules below.¹

When You Owe Self-Employment Tax

Standard rental income on Schedule E is not subject to self-employment tax. The distinction is what services you provide guests. Handing over a key and staying out of the way is a rental. Providing daily meals, in-stay housekeeping, or guided activities looks more like a hotel operation.³

Once services cross into “substantial services for the convenience of guests,” the income belongs on Schedule C, and the net profit is subject to self-employment tax at 15.3% for Social Security and Medicare, on top of ordinary income tax.⁵

Fresh towels at check-in don’t cross the line. A concierge-style operation with daily room service probably does. The test is whether your services resemble a hotel’s rather than a landlord’s.

The 3.8% Net Investment Income Tax

Higher-income owners owe an additional 3.8% Net Investment Income Tax on rental profits when modified adjusted gross income exceeds $200,000 for a single filer or $250,000 for joint filers. The tax applies to the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.⁶

Rental income, capital gains, interest, and dividends all count as net investment income for the calculation. The thresholds are not indexed to inflation, so more taxpayers cross them each year.⁷

What You Can Deduct

Most rental income can be offset through deductions, but shared expenses have to be prorated. Your “rental fraction” is the number of days rented at fair value divided by the total number of days the property was used for any purpose. That percentage applies to expenses that benefit both rental and personal use: mortgage interest, property insurance, property taxes, utilities.²

Expenses tied only to rental activity are fully deductible without proration. That includes cleaning between guests, listing fees charged by the platform, supplies stocked for guest use, and repairs made specifically for the rental. Keep receipts. These add up quickly and are the easiest deductions to lose in an audit because owners forget to track them.³

Depreciation

Depreciation is often the largest single deduction. The IRS lets you deduct the cost of the building (not the land) over 27.5 years using the straight-line method, claimed each year on Form 4562 and applied to the rental-use portion.⁸

It’s a paper deduction — no out-of-pocket cost in the year you take it. On a $300,000 building, that runs roughly $10,909 per year before the rental fraction, often converting a modest profit into a paper loss.

Skipping depreciation doesn’t help you. When you sell, the IRS calculates recapture on the depreciation you were entitled to take, whether or not you actually took it. Not claiming the deduction costs you twice.

Repairs vs. Improvements

Repairs are deducted in full the year you pay for them. Improvements have to be depreciated over 27.5 years. Fixing a leaky faucet is a repair. Replacing the plumbing system is an improvement.

The IRS asks whether the work is a betterment, adaptation, or restoration. Physically enlarging the property, adapting it to a new use, or restoring it to like-new condition after deterioration all count as improvements. Routine maintenance — patching drywall, replacing a broken window, servicing HVAC — is a repair. Classification can be the difference between a $5,000 deduction this year and $182 a year spread across nearly three decades.

Using Rental Losses Against Other Income

When deductions exceed rental income, you generate a rental loss. Rental activities are passive by default, and passive losses generally offset only passive income.⁹

An exception exists for owners who “actively participate” in managing the rental. The bar is low: making management decisions like approving tenants, setting rental terms, and authorizing repairs qualifies. Meet it and you can deduct up to $25,000 of rental losses against non-passive income each year.¹⁰

The allowance phases out as income rises. It starts shrinking once MAGI passes $100,000, losing 50 cents per dollar above that line, and disappears entirely at $150,000.¹⁰

Losses you can’t use carry forward. They offset future passive income, and when you eventually sell the entire property, all suspended passive losses from prior years become fully deductible in the year of sale.⁹

State and Local Occupancy Taxes

Most jurisdictions impose an occupancy, lodging, or transient occupancy tax on short-term stays on top of federal income tax. These local taxes typically apply to rentals of 30 consecutive days or fewer and run roughly 5% to 15% of the nightly rate, sometimes higher. You collect the tax from guests and remit it to the local taxing authority.

Airbnb, VRBO, and similar platforms have agreements with many local governments to collect and remit occupancy taxes automatically, but coverage varies by jurisdiction. The legal obligation to make sure the correct tax was paid stays with you. Some areas also impose state sales tax on the total rental transaction. Before your first booking, check whether your city or county requires a short-term rental permit or lodging tax registration; operating without one can trigger penalties independent of the tax itself.

Guests staying 30 or more consecutive days are usually exempt from occupancy tax, since the stay is treated as a long-term tenancy. If your rental mixes short and long stays, only the short-term bookings carry the collection obligation.

Getting a 1099-K From Your Rental Platform

Platforms that process your rental payments may be required to send you and the IRS a Form 1099-K. Under current law, that form is required when your gross payments exceed $20,000 and you have more than 200 transactions in a calendar year.¹¹

A 1099-K shows gross amounts, which include occupancy taxes and platform fees that passed through your account — money you never actually kept. It may also include refunded bookings or unrelated personal transactions if you share the payment account. The figure on the form will almost always exceed your actual taxable rental income, and you’re responsible for reconciling the difference on your return by reporting the 1099-K amount and then subtracting the portions that aren’t taxable income to you.

Not receiving a 1099-K doesn’t make your income tax-free. All rental income above the 14-day exemption is taxable and must be reported whether a form arrives or not.³

Quarterly Estimated Tax Payments

Rental income has no automatic withholding, so quarterly estimated payments are usually necessary to avoid an underpayment penalty. The IRS generally expects estimated payments if you’ll owe $1,000 or more at filing.¹²

The estimated tax year runs on four quarterly deadlines, typically in April, June, September, and the following January. For seasonal vacation rentals where most bookings hit the summer, matching your payments to when the income actually arrives is more accurate than splitting the annual estimate evenly across four dates. The September and January installments are usually the largest for summer-heavy properties.¹²

How Long to Keep Records

The general IRS retention period is three years from the date you filed the return. It extends to six years if you underreport gross income by more than 25%, and there’s no statute of limitations at all if you never file.¹³

Records tied to the property itself — purchase documents, improvement receipts, depreciation schedules — must be kept until the statute of limitations expires for the year you sell. You need them to calculate cost basis and depreciation recapture at sale, which can mean holding documents for decades. Store digital copies from the day you acquire the property.¹³

What Happens When You Sell

Selling a vacation rental triggers capital gains tax on the profit, but the bigger surprise for most owners is depreciation recapture. Every dollar of depreciation you deducted, or were entitled to deduct, is taxed at up to 25% at sale, regardless of your ordinary income bracket. This is the “unrecaptured Section 1250 gain,” and it applies even if you never actually claimed the deduction.¹⁴

On a property depreciated for 10 years at $10,000 per year, that’s $100,000 of accumulated depreciation taxed at up to 25%, roughly $25,000 in recapture before any capital gains tax on the rest of the profit. Any gain beyond the depreciation amount is taxed at long-term capital gains rates. Owners subject to the Net Investment Income Tax face an additional 3.8% on the entire gain.¹⁵

The IRS reduces your cost basis by the greater of depreciation “allowed or allowable,” meaning what you actually claimed or what you should have claimed, whichever is larger. Skipping depreciation to dodge future recapture gives you the worst of both outcomes. Claim the deduction you’re entitled to every year.¹⁵

1
Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc.
2
Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property
3
Internal Revenue Service. Topic No. 414, Rental Income and Expenses
4
Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
5
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
6
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
7
Internal Revenue Service. Net Investment Income Tax
8
Internal Revenue Service. Form 4562 – Depreciation and Amortization
9
Internal Revenue Service. Topic No. 425, Passive Activities – Losses and Credits
10
Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
11
Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill – Dollar Limit Reverts to $20,000
12
Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
13
Internal Revenue Service. How Long Should I Keep Records
14
Internal Revenue Service. Property (Basis, Sale of Home, Etc.) 5
15
Internal Revenue Service. Sale or Trade of Business, Depreciation, Rentals