Airbnb Tax Guide: Deductions, Depreciation & STR Tax Strategy

Deductible Expenses for Short-Term Rentals

Short-term rental operators can deduct the business-use portion of a wide range of expenses. The "business-use portion" is calculated based on the ratio of rental days to total days the property was used (rental days plus personal use days). If you rent the property 300 days and use it personally 30 days, 91% of expenses are deductible.

Operating Expense Deductions

Deductible operating expenses include: mortgage interest (reported on Form 1098 from your lender), property taxes, STR-specific insurance premiums, HOA fees, utilities (electricity, gas, water, internet), cleaning costs and cleaning supplies, platform fees paid to Airbnb or VRBO, property management fees, repairs and maintenance, landscaping, pest control, and any professional services (accounting, legal) directly related to the STR.

Capital Expenditure vs Repair Deduction

The distinction between deductible repairs and capitalized improvements is important. A repair restores the property to its original condition and is deductible in the year incurred: fixing a broken HVAC, patching a roof leak, replacing a broken appliance. An improvement adds value, extends the property's life, or adapts it to a new use — a new roof, a kitchen remodel, an added bathroom. Improvements must be capitalized and depreciated over time. The IRS's de minimis safe harbor rule allows immediate expensing of items costing $2,500 or less per item, which covers most furniture and equipment purchases.

Home Office and Vehicle Deductions

If you use a dedicated home office space exclusively for managing your STR business, you may be able to deduct a portion of home office expenses under IRC Section 280A. Vehicle mileage driven for STR business purposes — driving to the property for inspections, to purchase supplies, to meet contractors — is deductible at the standard mileage rate. Keep a contemporaneous mileage log; verbal records are insufficient in an audit.

Depreciation: The Most Powerful STR Deduction

Depreciation is the most powerful tax deduction available to STR investors because it is non-cash: you receive a tax deduction without any out-of-pocket payment. The IRS allows residential rental property (including short-term rentals) to be depreciated over 27.5 years using the Modified Accelerated Cost Recovery System (MACRS) straight-line method.

On a $450,000 property with $100,000 allocated to land (non-depreciable), the annual depreciation deduction is $350,000 / 27.5 = $12,727. This reduces your taxable income by $12,727 per year without requiring any cash payment. For an investor in the 32% marginal tax bracket, this saves $4,073 per year in federal income taxes.

Allocating Land vs Building Value

The land-to-building allocation significantly affects your depreciation deductions. The IRS requires a reasonable allocation, not simply accepting the property tax assessment ratio. Common methods include the tax assessor's allocation (acceptable if it is specific to the property and current), an appraisal allocation (strongest documentation), or a comparable land sales analysis. Higher building allocation means larger depreciation deductions — but an aggressive allocation without documentation creates audit risk.

Cost Segregation: Front-Loading Your Deductions

Cost segregation is an IRS-approved strategy that reclassifies certain building components from 27.5-year depreciation into shorter depreciation schedules: 5-year (personal property like appliances, carpeting, furniture), 7-year (certain fixtures), and 15-year (land improvements like landscaping, driveways, outdoor lighting). Depreciating these components over 5 or 15 years instead of 27.5 years dramatically front-loads your deductions into the early years of ownership.

A professional cost segregation study — conducted by a firm of engineers and tax professionals — typically identifies 20 to 35% of a residential property's value as eligible for reclassification to shorter lives. On a $500,000 property, that's $100,000 to $175,000 in assets reclassified from 27.5-year to 5-year or 15-year depreciation. The additional first-year deductions (before bonus depreciation) from reclassifying $100,000 of assets from 27.5-year to 5-year schedules increase annual depreciation by roughly $16,000 per year for the first 5 years.

Cost and Break-Even

A residential cost segregation study typically costs $3,000 to $8,000. For a property generating $120,000 in reclassified accelerated deductions, and an investor in the 35% tax bracket, the first-year tax savings are $42,000 — recovering the study cost within the first month. Cost segregation is generally cost-effective for properties purchased at $250,000 or above. Below that threshold, the additional deductions generated may not justify the study fee.

Bonus Depreciation in 2026

Bonus depreciation allows investors to immediately deduct a percentage of the cost of qualified property in the year it is placed in service, rather than depreciating it over its normal useful life. Assets eligible for bonus depreciation include the 5-year and 15-year property identified in a cost segregation study.

The bonus depreciation percentage has been phasing down since 2023: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. In 2027, bonus depreciation is currently scheduled to expire entirely under existing law (though Congress may extend it). At the 2026 rate of 20%, $100,000 of eligible 5-year property allows an immediate deduction of $20,000, with the remaining $80,000 depreciated over 5 years at $16,000 per year. As bonus depreciation rates decline, the value of cost segregation diminishes somewhat, but front-loading deductions even on 5-year schedules remains valuable relative to 27.5-year straight-line depreciation.

The Augusta Rule: Tax-Free Rental Income

IRC Section 280A(g), commonly called the Augusta Rule, allows homeowners to rent their primary or secondary residence for up to 14 days per year and exclude that income from taxable income entirely. The rental income does not need to be reported on a federal tax return. There is no expense deduction against this income (because it is excluded rather than offset), but the exclusion itself is valuable for high-income homeowners who can rent their primary home for premium events.

The Augusta Rule applies broadly beyond Augusta, Georgia. If you live near a major annual event — a music festival, sporting championship, major convention, graduation weekend — your primary home may be rentable for $2,000 to $10,000 for a multi-day stay, completely tax-free. The key requirements: the rental must be for 14 days or fewer total during the tax year, the property must be your primary or secondary residence, and the rental rate must be commercially reasonable.

Some STR investors who also use the Augusta Rule for their primary residence use a hybrid strategy: they rent their primary home for 14 days of peak local events (Augusta Rule income, tax-free) while operating separate STR investment properties under the normal rental income rules.

Material Participation and the STR Tax Loophole

Passive vs Active Income Classification

Under standard IRS rules, rental income is passive income. Passive losses (including depreciation losses on rental properties) can only offset passive income — they cannot offset wages, self-employment income, or portfolio income. This limits the immediate value of depreciation deductions for most investors, who must carry unused passive losses forward until the property is sold or they have sufficient passive income to absorb them.

The Short-Term Rental Exception

Short-term rental properties with an average guest stay of 7 days or fewer may qualify as an active business activity rather than passive rental activity under IRC Section 469. If the property qualifies as a non-passive activity AND you materially participate in its operations, losses (including depreciation losses) can offset other income — including W-2 wages and self-employment income — in the current year. This is a significant advantage that long-term rental investors generally cannot access.

Material participation for the STR exception requires meeting one of the IRS's seven material participation tests. The most commonly applicable test: you participated for more than 100 hours during the year AND your participation was more than the participation of any other person, including paid professionals. Maintaining detailed, contemporaneous logs of your time spent on STR activities is essential — verbal recollection in an audit is not sufficient documentation.

Real Estate Professional Status

Qualifying as a Real Estate Professional under IRC Section 469(c)(7) provides the broadest passive loss relief. A Real Estate Professional must: spend more than 750 hours per year in real property trades or businesses, and spend more time in real estate activities than in any other trade or business. For qualifying Real Estate Professionals, all rental losses (not just STR losses) are treated as non-passive and can offset any income type. This strategy is powerful but fact-intensive — it is subject to IRS scrutiny and requires meticulous documentation.

Record Keeping Requirements

Strong record keeping is the foundation of any STR tax strategy. The IRS requires substantiation for every deduction, and contemporaneous records are far stronger than reconstructed ones. For rental income, keep records of all booking confirmations, payout statements from Airbnb and VRBO, and bank statements showing deposits. For expenses, retain receipts for every purchase, service invoice for every contractor, and bank/credit card statements.

For material participation claims, maintain a contemporaneous time log: date, activity performed, time spent. A simple spreadsheet updated weekly is sufficient documentation. For personal use versus rental use allocation, keep a calendar of every night the property was used personally versus available for rental. These records become critical in an audit and should be retained for at least 3 years after the tax return is filed (7 years is more conservative for STR investors who claim large depreciation deductions).

Frequently Asked Questions