Let’s be honest: the dream of a short-term rental property isn’t just about hosting guests and five-star reviews. It’s about building an asset, generating income, and, well, keeping as much of that income as possible. That last part? It all comes down to taxes. Navigating the tax landscape for your Airbnb or Vrbo can feel like walking through a maze blindfolded. But it doesn’t have to.

Here’s the deal—understanding the rules can turn your property from a simple side hustle into a seriously efficient wealth-building tool. We’re going to break down the key tax considerations, from the moment you buy to the day you file. Grab a coffee, and let’s dive in.

The Big Picture: Is It a Business or a Hobby?

This is the foundational question. The IRS looks at your activity to determine if you’re running a business for profit or just renting out a place occasionally. Why does it matter? Well, business losses can often offset other income, and you get to deduct all your ordinary and necessary expenses. Hobby income? It’s fully taxable, and deductions are severely limited.

Generally, if you’re actively trying to make a profit, keeping records, and treating it like a business, you’re probably in the clear. But if you’re only renting your personal vacation home for two weeks a year, that’s a different story. The line can be fuzzy, so consistency in your approach is key.

Key Deductions: What You Can Write Off

This is where the magic happens. Running a short-term rental opens the door to a wide array of deductions that can drastically lower your taxable income. Think of these as the tools in your financial toolkit.

Operating Expenses (The Day-to-Day Stuff)

These are the costs of just keeping the lights on and the property running. You can deduct these in the year you pay them.

• Utilities & Internet: Electricity, gas, water, trash, and that high-speed Wi-Fi your guests demand.
• Supplies & Amenities: Toilet paper, coffee, shampoo, welcome baskets—all of it.
• Cleaning & Maintenance: Fees for your cleaner, lawn care, pool service, and repairs (not big improvements, though—we’ll get to that).
• Marketing & Fees: Commissions paid to Airbnb, Vrbo, or a property manager. Even the cost of professional photography for your listing.
• Insurance: Your specialized short-term rental insurance policy premiums.

Capital Expenses (The Big-Ticket Items)

These are larger purchases that improve the property’s value or lifespan. You generally can’t deduct them all at once. Instead, you depreciate them—deducting a portion of the cost over several years.

The big one here is the property itself (excluding the land value). You can depreciate the building over 27.5 years. That’s a steady annual deduction that can shield a chunk of your income.

Other capital expenses include:

• New appliances (refrigerator, washer/dryer).
• Furniture and decor (sofas, beds, tables).
• Significant renovations (a new roof, replacing all the windows).

The 14-Day Rule & Personal Use: A Critical Distinction

This rule is a game-changer and a common source of confusion. If you use the property for personal purposes for more than 14 days (or 10% of the total days it’s rented, whichever is greater), the IRS treats it as a personal residence with rental income. This limits your deductions.

But if you limit personal use to 14 days or less, you can deduct expenses up to the amount of your rental income. Honestly, for serious investors, staying under this 14-day threshold is often the smartest move to maximize deductions.

Depreciation & Cost Segregation: An Advanced Play

We mentioned depreciation. But there’s a more accelerated strategy called a cost segregation study. Instead of depreciating the entire building over 27.5 years, this study identifies components (like flooring, lighting, plumbing fixtures, landscaping) that can be depreciated over 5, 7, or 15 years.

The result? Much larger deductions in the early years of ownership, which improves cash flow. It’s a complex analysis best done with a tax pro, but for larger properties, it can be a powerful tool.

Tax Obligations by Level: It’s Not Just the IRS

People often forget that taxes happen at multiple levels. Here’s a quick, somewhat messy breakdown—because government rarely makes things simple.

Tax Level	What It Covers	Key Consideration
Federal Income Tax	Profit from your rental activity.	Schedule E on your Form 1040 is your new best friend.
Self-Employment Tax	Social Security & Medicare. Usually does not apply to rental income.	Big exception: If you provide “substantial services” (like daily tours or meals), it might be considered a business subject to this tax.
State & Local Income Tax	Varies wildly by location.	Some states have no income tax; others have high rates. You must file in the state where the property is located.
Occupancy & Tourist Taxes	Local taxes on transient guests. Collected via platforms like Airbnb.	You’re responsible for ensuring these are filed and paid, even if the platform collects them. Don’t assume it’s automatic.

Record Keeping: Your Financial Safety Net

You can have all the knowledge in the world, but without receipts, it’s just theory. Meticulous records are non-negotiable. Use a dedicated business bank account, snap photos of every receipt, and track mileage for property-related trips. A cloud-based accounting app can save your sanity here. Think of it as building your defense file—just in case.

The 1031 Exchange: Deferring Taxes When You Sell

What if you want to sell one rental and buy another? A 1031 exchange allows you to defer paying capital gains taxes by reinvesting the proceeds into a “like-kind” property. The rules are strict—tight timelines, a qualified intermediary must hold the funds, the properties must be for investment—but the tax savings can be monumental, letting your capital compound faster.

A Final, Unavoidable Truth

Look, this is a lot. The tax code for short-term rentals is nuanced and constantly shifting with new local laws and IRS guidance. Trying to DIY it completely is like being your own lawyer in court—possible, but incredibly risky. The smartest investment you can make in your short-term rental business isn’t a new smart lock or fancy linens. It’s finding a great CPA or tax advisor who understands real estate and the specific quirks of the short-term rental world.

They’ll help you navigate the maze, plan for the future, and ensure you’re not leaving money—or worse, inviting audits—on the table. Because at the end of the day, it’s not about how much you make. It’s about how much you keep.