Tax season doesn't have to be a source of dread for short-term rental (STR) owners. The key to a smooth filing process is staying organized throughout the year and knowing exactly which documents to gather when December rolls around. Use this evergreen guide to close out your books confidently, protect your revenue, and maximize your legal deductions.
1. Confirm Your Filing Classification
Before you begin tallying expenses, you must determine how the IRS views your rental activity. Your classification dictates which forms you use and whether you owe self-employment tax.
The 14-Day Rule: If you rented your property for 14 days or fewer during the year, the income is tax-free and does not need to be reported. However, you cannot claim rental deductions.
Schedule E (Supplemental Income): This is where most STR operators report. It covers rental income and expenses as a passive activity.
Schedule C (Business Income): This is required only if you provide substantial services to guests, such as daily cleaning, concierge services, or prepared meals. Reporting here triggers self-employment tax.
2. Reconcile All Rental Income
When reporting income, always start with the gross amount. Many hosts make the mistake of reporting the net amount deposited into their bank accounts, which misses the opportunity to deduct platform fees separately.
Download year-end earnings summaries from every platform (Airbnb, Vrbo, Booking.com, and direct booking tools).
Account for all income sources, including cleaning fees, pet fees, and retained security deposits.
Lodging Taxes: Confirm whether each platform remits local occupancy taxes on your behalf or if you are responsible for filing those separately with your municipality.
3. Track Personal vs. Rental Use Days
If you ever stay in your rental property, you must allocate your expenses.
The Allocation Formula: Rental Expense % = Days Rented / (Days Rented + Days Personal Use).
Maintenance Exception: Days spent performing substantial repairs do not count as personal use.
The 10% Rule: Your property is considered a "home" (limiting loss deductions) if personal use exceeds the greater of 14 days or 10% of the total days it was rented.
4. Organize Deductible Expenses by Category
Organize your receipts and invoices by property and category to make data entry seamless for your CPA.
Property Operating Expenses
Turnover: Cleaning, landscaping, and laundry services.
Fixed Costs: Utilities (Wi-Fi, water, gas), HOA fees, property taxes, and STR-specific insurance.
Interest: Mortgage interest (referenced from your Form 1098).
Business & Marketing
Software: Property management systems (PMS), dynamic pricing tools, and guest-dedicated streaming subscriptions.
Advertising: Professional photography, social media ads, and platform service fees.
Vehicle and Travel
Keep a detailed mileage log for supply runs and contractor meetings.
Deduct airfare and lodging if the primary purpose of a trip was property management.
5. Separate Repairs from Improvements
The IRS treats these two categories very differently. Getting this wrong can lead to an audit.
Repairs: These restore the property to its original condition (e.g., fixing a leaky faucet). These are fully deductible in the current tax year.
Improvements: These add value or extend the property’s life (e.g., a new roof or kitchen remodel). These must be capitalized and depreciated over many years.
6. Review Depreciation Schedules
Depreciation is a non-cash expense that can significantly lower your taxable income. Even if you don't claim it, the IRS will calculate your taxes as if you did when you sell the property, so always claim it.
Residential Property: Depreciated over 27.5 years.
Furnishings & Equipment: Depreciated over 5 to 7 years.
Cost Segregation: For properties valued over $300,000, consider a cost segregation study to reclassify parts of the building into shorter 5, 7, or 15-year schedules, accelerating your deductions.
7. Understand Passive Activity and Loss Rules
STR losses aren't always deductible against your W-2 income.
The "7-Day" Loophole: If your average guest stay is 7 days or fewer and you "materially participate" in the business, the activity may be treated as non-passive, allowing losses to offset other active income.
Active Participation: If your Modified Adjusted Gross Income (MAGI) is under $100k, you may be able to deduct up to $25k in rental losses.
8. Record keeping and Retention
Good records are your best defense.
Retention: Keep general tax records for 7 years. Keep purchase, sale, and depreciation records permanently.
Separation: Use a dedicated bank account for your STR business to avoid "commingling" funds, which makes auditing much easier.
Key IRS Forms for STR Operators
Schedule E: Rental income and expenses.
Form 4562: Depreciation and Section 179 deductions.
Form 8582: Passive activity loss limitations.
Final Step: Review with a Tax Professional
Because short-term rental laws vary by jurisdiction and the "7-day rule" involves complex material participation tests, always review your return with a CPA who specializes in real estate.