Short-term rentals with an average guest stay of seven days or less follow special tax rules. Many owners assume all rental income is passive. However, the IRS treats these short stays differently. This guide explains how short-term rentals under seven days are taxed and what that means for you.
Why short-term rentals under seven days are different
Under the passive activity rules, a property with an average stay of seven days or less is generally not treated as a “rental activity.” Instead, it is treated more like a business. For details, see IRS Publication 925.
This matters in two main ways. First, it affects whether you can deduct losses against other income. Second, together with the services you provide, it affects where you report the income and whether self-employment tax applies.
Deducting losses from short-term rentals
Normally, rental losses are passive. So you can only deduct them against passive income, with limited exceptions. By contrast, a short-term rental with stays of seven days or less isn’t a rental activity. So if you materially participate, your losses may offset wages and other income.
To materially participate, you must meet one of the IRS tests. For example, you might work more than 500 hours on the activity during the year. Or you might work more than 100 hours and more than anyone else. Keep a detailed log of your hours to support your position.
This is why owners often pair short-term rentals with a cost segregation study. Faster depreciation can create large losses in the early years. If you materially participate, those losses may reduce your other taxable income.
Schedule C or Schedule E?
A short average stay alone doesn’t put your income on Schedule C. Instead, the key question is whether you provide substantial services to guests. Examples include daily cleaning during stays, meals, concierge services or other hotel-like services.
- No substantial services. You generally report income and expenses on Schedule E. In that case, self-employment tax usually doesn’t apply.
- Substantial services. You generally report on Schedule C. As a result, your net profit is subject to self-employment tax of 15.3%, up to the Social Security wage base.
Other tax considerations for short-term rentals
Deductible expenses
Either way, you can deduct ordinary and necessary expenses. For instance, these include platform fees, cleaning, supplies, repairs, utilities, insurance and depreciation.
Qualified business income deduction
If your rental rises to the level of a trade or business, you may qualify for the qualified business income deduction under Section 199A. It can be worth up to 20% of qualified business income.
Personal use
Also, if you or your family use the property, special limits may apply to your deductions. So track personal-use days carefully.
Get help with your short-term rentals
The rules for short-term rentals depend on your facts, including stay length, services and hours worked. We help owners plan and document their position. To discuss your property, call (415) 842-2940 or book a free 15-minute call.