Short-Term Rental Tax Rules: A CPA’s Guide

Short-term rentals whether vacation homes, second homes, or investment properties, generate extra income for thousands of property owners. Some owners rent their properties occasionally, while others operate full-time rentals through platforms like Airbnb or Vrbo. Either way, you need to understand how the IRS taxes short-term rentals.

Once the short-term rental income starts coming in, understanding the income tax implications becomes critical. The IRS doesn’t take a one-size-fits-all approach; the short term rental tax rules can be complex.

Several factors determine your specific tax treatment:

• How often you rent the property
• How many days you use it personally
• Whether you provide services to improve guest experiences

Two owners with similar properties can face completely different tax bills based on these factors. Understanding these rules helps you stay compliant and maximize available tax benefits.

Our accounting firm for short term rental clients specializes in helping term rental owners understand these rules. WhippleWood CPAs has outlined the key takeaways below.

What the IRS Considers a Short-Term Rental

The IRS defines a short-term rental as any property where the average guest stay is seven days or fewer. For example, hosting guests at your short term rental properties for 55 days across 10 separate stays, your average is 5.5 days.

Common property types include:

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

Because these are not long-term leases, the IRS applies a different tax treatment. How you use the property and what services you provide can change how you report earnings and which deductions you can claim.

Understanding the 14-Day Rule

This is often called the “14 day rule for rental property.” Property owners who rent for 14 days or fewer don’t report the income or deduct expenses. The IRS doesn’t consider this taxable rental activity.

At the same time, related expenses are not deductible. This 14 day rent rule effectively means the IRS considers it a personal residence for tax purposes.

Mixed Use vs. Primarily Rental

Once you rent your property for more than 14 days, you must report all vacation rental income. From there, the IRS classifies it as either mixed-use or primarily for business, depending on personal use. 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, you must split expenses between rental and personal use.

Reporting Requirements

Most property owners report earnings on Schedule E (Form 1040). However, the IRS may reclassify your activity as a business operation: daily housekeeping, meals, concierge services, or entertainment.

In that case, tax filings must use Schedule C. The income then becomes subject to self-employment tax in addition to income tax.

Deductible Expenses

Short-term rental owners can deduct ordinary and necessary business expenses, including:

• Mortgage interest and property taxes
• Utilities, internet, and cable services
• Cleaning fees and housekeeping supplies
• Repairs and ongoing maintenance
• Property insurance and liability coverage
• Platform fees from Airbnb, Vrbo, and other booking services
• Advertising and marketing costs
• Property management fees

These itemized deductions can lower your total tax burden. For mixed-use properties, you must split expenses based on rental days versus personal days.

How Owner Involvement Affects Tax Strategy

Under IRC Section 469, the IRS typically classifies real estate investments as passive activities. This means you can only use losses 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. This provided their earnings fall below certain IRS thresholds. These activities include setting rental terms, approving guests, and handling maintenance.

The IRS doesn’t treat short-term rentals as rental activities at all if you meet “material participation” standards. The most common is working more than 500 hours per year on the property. You can also qualify if you do substantially all the work yourself.

When you meet these standards, the IRS considers your activity non-passive. This allows you to offset any type of income—including wages and business earnings—with losses from the property.

Common Scenarios

Scenario A — Occasional Rental, Mostly Personal Use

You own a lake cabin that you rent for 10 days during the year. You and your family use it personally for 30 days. Because you rent it for 14 days or fewer, the 14-day rule applies.

You don’t report the income as taxable, and you cannot deduct any expenses. The IRS treats this as a personal residence, not a rental activity.

Scenario B — Primarily Rental Use

You rent your beach house for 100 days throughout the year. You visit the property twice for maintenance, totaling two weeks.

Maintenance days don’t count as personal use under IRS rules. The property qualifies as 100% business use. You report all income on Schedule E and deduct 100% of expenses without proration.

Scenario C — Mixed Use

You rent your vacation condo for 14 weeks and stay there for approximately five months during the off-season. In this case, the property qualifies as mixed-use. You must report all rental income, but you can only deduct the portion of expenses that corresponds to rental days. Your personal use also limits your ability to deduct losses beyond the rental income you generate.

Other Considerations

• State and Local Taxes: Many cities and counties impose occupancy, lodging, or sales taxes. These are separate from federal income taxes. Some platforms collect these automatically but others don’t. Owners are responsible for compliance.
• 1099-K Reporting: Airbnb, Vrbo, and other short – term rental platforms may issue Form 1099-K for payments over a certain limit. You must report all income even if you don’t receive this form.
• Depreciation: Owners who meet material participation requirements may want to consider a cost segregation study. This strategy accelerates depreciation on specific components like appliances and improvements. You can front-load deductions and reduce taxable income, especially during the early years of ownership.

Contact Us

Short-term rental income can be an excellent source of cash flow, but the taxes on vacation rental income are not simple. Your tax treatment depends on personal use, service levels, and your involvement in day-to-day management.

If you have questions or need assistance with your tax filings, WhippleWood CPAs can help. For additional information call 303-989-7600. We look forward to speaking with you soon.