Short-term rental income is taxable. But the tax code also provides a long list of deductions that can dramatically reduce what you actually owe. Depreciation alone can create thousands of dollars in paper losses each year. Combined with operating expense deductions, the 14-day rule, and the STR tax loophole for material participants, many hosts pay far less in taxes than their gross revenue would suggest.
This guide explains how STR income is taxed and walks through every major deduction. It is not a list of expenses (that's covered in our STR expenses guide). This is about how those expenses reduce your tax bill.
Tax Disclaimer
This guide is for informational purposes only and does not constitute tax advice. Tax laws are complex and change frequently. Consult a qualified CPA or tax professional for advice specific to your situation.
How Airbnb Income Is Taxed
Rental income from Airbnb, VRBO, or any short-term rental platform is taxed as ordinary income. You report it annually on Schedule E (Supplemental Income and Loss) of your federal tax return.
The key concept: deductions lower your taxable rental income, not your actual income. You still collect the same revenue. You just owe taxes on less of it.
Example: How Deductions Work
You collected $40,000 but only pay taxes on $22,000. The $18,000 in deductions saved you thousands in actual tax liability depending on your marginal rate.
The 14-Day Rule
If you rent your property for 14 days or fewer per year and use it personally for at least 14 days (or 10% of the total days rented, whichever is greater), the rental income is completely tax-free. You do not report it on your tax return. You also cannot deduct any rental expenses for those days.
This rule applies whether you rent a single room or the entire property. It exists in the tax code under IRC Section 280A(g).
There is an important caveat. Airbnb and other platforms may still issue a 1099-K for gross payments processed, even if your total rental days are under 14. If the IRS receives a 1099-K showing income, you would need to document the 14-day exception on your return to avoid triggering questions.
For most serious STR investors, this rule is informational rather than strategic. If you are running a property as an active rental business, you will exceed 14 rental days early in the year. The real tax benefits come from the deductions covered below.
Deductible Operating Expenses
The IRS allows you to deduct "ordinary and necessary" business expenses from your rental income. These are the costs required to operate and maintain your short-term rental. For a detailed breakdown of what each category costs, see our complete STR expenses guide.
Platform Fees
Airbnb's 3% host service fee (under the split-fee model) or 14-16% (under the host-only model) is fully deductible. VRBO fees of 5% or 8% are also deductible. These are costs of doing business and reduce your taxable income dollar-for-dollar. See our Airbnb fees breakdown for details on each fee model.
Cleaning and Turnover Costs
Professional cleaning between guests, laundry services, cleaning supplies, and restocking consumables are all deductible. These costs are directly tied to generating rental income and qualify as ordinary business expenses.
Utilities
Electric, gas, water, internet, and trash service are deductible. If the property is used both personally and as a rental (mixed-use), only the rental-use portion is deductible. You calculate this based on the ratio of rental days to total use days.
Insurance
STR-specific insurance premiums are deductible. This is your own policy, not Airbnb's AirCover program. STR insurance typically runs $700 to $3,500 per year depending on property value and coverage level.
Repairs and Maintenance
Repairs are fully deductible in the year incurred. The key distinction: repairs (fixing a leaky faucet, patching drywall, replacing a broken window) can be deducted immediately. Improvements (a new roof, adding a deck, remodeling a bathroom) must be capitalized and depreciated over time. The IRS draws this line based on whether you are restoring the property to its original condition (repair) or adding new value (improvement).
Property Management and Co-Host Fees
Property management software subscriptions and co-host commission fees are deductible business expenses. If you pay a co-host 15-25% of revenue, that entire amount reduces your taxable rental income.
Supplies and Guest Amenities
Toiletries, coffee, towels, linens, kitchen supplies, and other items provided to guests are deductible as ordinary business expenses. These are small per turnover but add up over a full year of hosting.
Professional Services
Accountant and CPA fees, legal fees, and bookkeeping software subscriptions are deductible. Dynamic pricing tools like PriceLabs also qualify as deductible business software expenses.
Depreciation
Depreciation is the biggest and most misunderstood deduction for STR owners. It allows you to deduct the cost of the building (not the land) over its useful life, even though you are not spending any additional cash.
Residential rental property depreciates over 27.5 years under the Modified Accelerated Cost Recovery System (MACRS). You can start depreciating as soon as the property is "placed in service," meaning it is available and ready for rental use.
Depreciation Example
This is a paper loss. You deduct $8,727 each year from your rental income without spending any additional cash. Over 10 years, that is $87,270 in tax deductions from depreciation alone.
Cost segregation studies can accelerate depreciation further. A cost segregation study identifies building components (appliances, fixtures, cabinetry, landscaping, paving) that can be depreciated on 5-year, 7-year, or 15-year schedules instead of 27.5 years. This front-loads deductions into the early years of ownership.
One important caveat: depreciation is "recaptured" when you sell the property. The IRS taxes previously claimed depreciation at a rate of 25% upon sale. This does not eliminate the benefit of depreciation, but it does mean the savings are deferred rather than permanent. Factor this into your long-term investment plan.
The Short-Term Rental Tax Loophole
This is the strategy that generates the most interest among STR investors, and it is one of the most valuable if you qualify.
Under normal tax rules, rental income is classified as "passive" income. Passive losses (including depreciation) can only offset passive income. They cannot offset your W-2 wages, business income, or other active income. This limits the tax benefit of depreciation for most landlords.
The STR loophole: if the average guest stay at your property is 7 days or fewer and you materially participate in the rental activity, the IRS classifies the income as non-passive. This means your losses (including depreciation and cost segregation deductions) can offset W-2 income and other active income sources.
Requirement 1: Average Stay of 7 Days or Fewer
Calculate your average guest stay by dividing total rental nights by total number of bookings. Most Airbnb properties naturally meet this threshold since the average Airbnb booking is 3 to 4 nights.
Requirement 2: Material Participation
The most commonly used test: you must spend 100 or more hours on the STR activity during the year, and more hours than any other individual involved (including co-hosts and property managers). Other material participation tests exist, but this is the one most STR hosts rely on.
How It Differs from REPS
Real Estate Professional Status (REPS) is a separate path that requires 750+ hours per year in real estate activities and more time in real estate than any other profession. The STR loophole has a much lower bar: 100+ hours and a short average stay. They are not the same strategy.
The One Big Beautiful Bill Act (passed July 2025) retroactively restored 100% bonus depreciation for eligible property placed in service after January 19, 2025. This means qualifying assets identified through a cost segregation study can be fully depreciated in year one, front-loading significant deductions and creating a large paper loss that offsets active income. Tax law changes frequently, so verify current bonus depreciation rates with your CPA before relying on this benefit.
Consult a CPA
The STR tax loophole involves complex interactions between passive activity rules, material participation tests, and depreciation schedules. The tax savings can be substantial, but getting it wrong can trigger IRS audits and penalties. Work with a CPA who specializes in real estate or short-term rentals.
Qualified Business Income (QBI) Deduction
If your STR qualifies as a trade or business under Section 162 or meets the IRS Safe Harbor requirements, you may be eligible to deduct up to 20% of your net rental income under the Qualified Business Income (QBI) deduction.
The One Big Beautiful Bill Act made the QBI deduction permanent and may have expanded eligibility thresholds. Consult a CPA for the latest details on how QBI applies to your specific rental situation.
Income thresholds affect the deduction at higher income levels. Not all STRs qualify automatically. You generally need to demonstrate material participation or file a Safe Harbor election (Rev. Proc. 2019-38) to establish your rental as a qualifying trade or business.
This is another area where a CPA experienced with rental properties can help you determine eligibility and file the necessary elections.
Mortgage Interest and Property Taxes
Mortgage interest on investment property is fully deductible against rental income. Unlike your personal residence (where the SALT deduction is capped at $10,000), there is no cap on mortgage interest deductions for investment properties. It is deducted on Schedule E as a rental expense.
Property taxes are also fully deductible as a rental expense. These are often the two largest line items after depreciation.
Tax deductions like these reduce your reported income, which is one reason DSCR loans are popular with STR investors. DSCR lenders qualify you based on the property's income rather than your personal tax returns, which may show lower income due to deductions.
What You Cannot Deduct
Personal Use Days
If you use the property personally, expenses must be prorated between personal and rental use. Only the rental portion is deductible.
Capital Improvements
New roofs, additions, remodels, and other improvements cannot be expensed in year one. They must be capitalized and depreciated over their useful life. For startup and setup costs, the same rule applies to significant improvements.
Fines and Penalties
Fines from regulation violations, zoning penalties, or other government-imposed penalties are not deductible.
Commuting Costs
Travel costs to and from a property you also live in are considered commuting and not deductible. Travel between separate rental properties or to a property in a different market is deductible.
Land Value
Only the building and improvements depreciate. Land does not lose value over time in the eyes of the IRS and cannot be depreciated.
Record-Keeping Best Practices
Good record-keeping is the foundation of every deduction on this list. If you cannot document an expense, you cannot deduct it.
Separate Bank Accounts
Keep rental income and expenses in a dedicated bank account. Mixing personal and rental finances creates problems at tax time and raises red flags during audits.
Save All Receipts
Document every expense with receipts, invoices, or bank statements. Digital copies are acceptable. The IRS can request documentation for any deduction you claim.
Track Personal vs. Rental Use Days
Keep a log of every day the property is rented, every day it is used personally, and every day it sits vacant. This determines your deduction eligibility for mixed-use properties and affects the 14-day rule.
Use Accounting Software
QuickBooks, Stessa, or even a well-organized spreadsheet works. The goal is consistent categorization throughout the year so tax preparation is straightforward. For market data that supports income projections on tax filings, tools like AirDNA can provide market comparables to substantiate your income figures.