How Short-Term Rentals Are Taxed

Short-term rentals show up in many different forms, from vacation homes and second properties to investment units. Some are rented out occasionally, others bring in steady income throughout the year. Regardless, once the rental income starts coming in, it’s important to understand how it’s taxed.

The IRS doesn’t take a one-size-fits-all approach. How often the property is rented, how it’s used personally, and whether guests receive any services all factors into the tax equation. Two owners with similar homes can wind up with very different tax results based on how the property is managed. For anyone earning income this way, understanding these rules is key to staying on track and making the most of the opportunities available. To help clients, prospects, and others, WhippleWood CPAs  has summarized the key details below.

What the IRS Considers a Short-Term Rental

From a tax perspective, a short-term rental is defined as a property rented for an average stay of seven days or fewer. For example, renting a property for 55 days of the year to a total of 10 renters, results in an average stay of five days. Common property types include:

• Vacation homes rented seasonally
• Second homes listed between personal stays
• Cabins or beach houses used part-time
• Properties listed year-round on short-term rental platforms

Because these are not long-term leases, they are treated differently under IRS rules. The way the property is used along with the level of service provided by the owner can change how income is reported and which deductions are allowed.

How Short-Term Rentals Are Taxed

• The 14-Day Rule — If a property is rented to others for 14 days or fewer during the year, the IRS does not consider it a rental activity. The income is not taxable and does not need to be reported. At the same time, rental-related expenses are not deductible. This rule applies even if the owner also uses the property personally. It’s considered a personal residence for tax purposes.
• Mixed Use vs. Primarily Rental — If the property is rented for more than 14 days, it becomes a reportable activity. From there, the IRS classifies it as either mixed-use or primarily rental, depending on how much the owner uses the property personally. Maintenance days don’t count toward personal use, but vacation days do. If personal use exceeds 14 days or 10% of the total rental days, then expenses must be prorated between personal and rental use.
• Reporting Requirements — Short-term rental income is typically reported on Schedule E (Form 1040). However, if the owner provides “substantial services,” such as daily cleaning, meals, or entertainment, the IRS may consider the activity a business. In that case, income must be reported on Schedule C, and it becomes subject to self-employment tax in addition to income tax.
• Deductible Expenses — Short-term rental owners can deduct ordinary and necessary expenses. This includes mortgage interest, property taxes, utilities, cleaning, maintenance, insurance, etc. In mixed-use scenarios, expenses must be divided based on the number of days rented versus days used personally.

How Owner Involvement Affects Tax Strategy

Under IRC Section 469, rental real estate is generally considered a passive activity, which means that losses can only be used to offset other passive income. However, there are exceptions that depend on how involved the property owner is in managing the short-term rental. For example, owners who “actively participate” may be eligible to deduct up to $25,000 in passive losses, provided income falls below certain limits. These activities include setting rental terms, approving guests, and handling maintenance.

In certain cases, short-term rentals are not treated as rental activities at all. If the owner meets IRS standards for “material participation,” such as spending 500 hours a year on the rental or performing most of the work themselves, the activity may be considered non-passive. This allows any losses to offset other types of income such as W-2 wages or business earnings. While these provisions are not relevant for every property owner, they can offer a tax advantage for those who are involved in managing short-term rental operations.

Common Scenarios

Scenario A — Occasional Rental, Mostly Personal Use

A lake cabin is rented for just 10 days during the year and used personally for 30. Because the property is rented for 14 days or fewer, the income is not reported and the expenses are not deductible. From a tax perspective, the rental activity is not recognized by the IRS.

Scenario B — Primarily Rental Use

A beach house is rented out for 100 days and used personally only for two weeks dedicated to maintenance. Since these maintenance days fall within the limits, they do not count as personal use, and the property is treated as 100% rental. All rental income must be reported on Schedule E. Related expenses are fully deductible without proration.

Scenario C — Mixed Use

A vacation condo is rented for 14 weeks and occupied by the owner during the off-season for approximately five months. In this case, the property qualifies as mixed-use. The owner must report all rental income but may only deduct the portion of expenses related to rental use. Personal use limits the ability to deduct losses beyond rental income.

Other Considerations

• State and Local Taxes — Many cities and counties impose occupancy, lodging, or sales taxes. Some platforms collect these automatically; others don’t. Owners are responsible for compliance.
• 1099-K Reporting — Airbnb, Vbro, and other platforms may issue Form 1099-K for payments over a certain limit. Even if no form is received, the income must be reported.
• Depreciation — Owners who meet material participation requirements may want to consider a cost segregation study. By accelerating depreciation on certain components of the property (like appliances or outdoor improvements), they can front-load deductions and reduce taxable income, especially in the early years of ownership.

Contact Us

Short-term rental income can be an excellent source of cash flow, but it’s not as simple as collecting rent and reporting earnings. Tax treatment depends on personal use, service levels, and how involved the owner is in day-to-day management. If you have questions about the information outlined above or need assistance with another tax or accounting issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.