Renting out a property on Airbnb or VRBO can be a solid way to make money. But the tax side of it gets messy fast. Between the IRS rules, local occupancy taxes, and the question of whether you are running a business or just renting out your weekend place, there is a lot to keep straight.
The good news is that the tax code has a few provisions that work in your favor if you know how to use them. Here is what matters.
What Is the 14-Day Rule and How Does It Work?
This is the one every part-time host needs to know about.
If you rent out your property for 14 days or fewer during the year, you pay zero tax on that income. You do not report it. The IRS does not want to know about it.
Here is how it works. You rent your beach house for one week in July and one week in August. That is 14 days. You charge $800 a night. You make $11,200. That money is yours, tax-free.
The catch is personal use. You cannot rent it for 14 days and live in it for 300 days and claim the exemption. You need to have used the property yourself for more than 14 days or more than 10 percent of the rental days, whichever is greater. For most people with a vacation home, that is easy to hit.
Once you hit day 15 of rentals, the whole thing changes. The income becomes taxable and you have to report it.
What Happens If I Rent for More Than 14 Days?
Once you cross that 14-day threshold, you are running a rental business in the eyes of the IRS. That means you report the income, but it also means you get to deduct expenses.
And there are a lot of them.
Mortgage interest and property taxes. You deduct these based on the percentage of the year the property was rented. If it was rented for 100 days and you used it for 30 days, you deduct roughly 77 percent of those costs.
Operating costs. Cleaning fees, utilities, internet, trash pickup, landscaping. All of it gets allocated between rental and personal use.
Repairs. A broken toilet, a leaky roof, a hole in the drywall. Repairs are deductible in the year they happen. Improvements, like a new kitchen or a new roof, get depreciated over time.
Depreciation. This is the big one. The IRS lets you deduct the cost of the building (not the land) over 27.5 years. For a rental property, that deduction can wipe out most or all of your rental income on paper.
Management fees. If you pay a property manager or a cleaning crew, those costs are deductible.
What Is Material Participation and Why Does It Matter?
Here is where things get interesting for people who are serious about rentals.
If you actively manage your property, you might qualify as “materially participating.” That matters because rental income is usually considered passive. Passive losses can only offset passive income. But if you materially participate, you might be able to use rental losses to offset your regular W-2 income or business income.
To qualify, you need to meet one of a few tests. The most common ones are:
- You spend more than 500 hours a year managing the property.
- You spend more than 100 hours and no one else spends more time than you.
- You are the only person substantially involved.
If you hire a property manager to do everything, you probably do not qualify. If you are the one handling bookings, cleaning, maintenance, and guest issues, you likely do.
What Are the Most Common Mistakes People Make?
I see the same issues come up every year.
Not tracking days. If you do not know how many days the property was rented versus used personally, you cannot allocate expenses correctly. That leads to overstating deductions or underreporting income. Keep a log.
Mixing personal and rental expenses. If you use the property yourself for three weeks and try to deduct the entire year’s utilities, the IRS will catch it. Allocate expenses based on actual usage.
Ignoring local taxes. Most towns and cities that allow short-term rentals require you to collect and remit occupancy taxes. Some hosts forget this and end up with surprise bills.
Depreciation recapture. This is the one that gets people at sale. If you claim depreciation over the years, the IRS takes some of it back when you sell. You can defer it with a 1031 exchange, but if you just sell, expect to pay tax on that depreciation recapture.
When Should I Hire a Professional?
If you rent out a property for a few weeks a year, you can probably handle the taxes yourself. The 14-day rule makes it simple.
If you have multiple properties, rent year-round, or are trying to use losses to offset other income, you need a professional. The rules around passive activity, material participation, and depreciation are too easy to mess up.
At Dimov Tax, we do this work every day. We help owners figure out whether they qualify for the 14-day rule, how to structure their deductions, and how to stay compliant with local taxes. If you want to run your numbers by someone, reach out.