Renting out your home or vacation property for short stays can have its perks: extra income, greater flexibility, and, in some cases, tax benefits. But before listing your property for the summer, it’s important to understand how rental income is taxed and which expenses may be deductible.

Qualifying for Tax Treatment: Two Key Tests

For tax reporting purposes, renting out your home assumes the dwelling may qualify as a personal residence. To determine how income and expenses are treated, two tests apply:

  1. Personal use test: You use the property for personal purposes for more than the greater of: 14 days, or 10% of the total days the property is rented at a fair rental price.
  2. Rental use test: You rent the property at fair value for 14 or more days during the tax year.

These tests are applied annually. One year, your property may qualify as a residence with rental use; another year, it may be treated as a full rental property; and in other cases, it may be rented for fewer than 14 days. If the property is rented for 14 days or fewer, rental income is generally not required to be reported, and rental expenses are not deductible. However, mortgage interest and real estate taxes may still be deductible as personal itemized deductions, subject to current limitations.

Determining Your Deductions

If you meet both tests and rental income must be reported, the next step is determining which expenses can be deducted. Expenses typically fall into two categories: direct and indirect.

Direct Expenses

Direct expenses are those that relate solely to renting the property. Generally, 100% of direct expenses are deductible against rental income. Examples include:

  • Advertising the property for rent
  • Booking or platform fees
  • Cleaning costs between renters
  • Property management fees
  • Required permits or local licensing fees

Indirect Expenses

Indirect expenses are costs incurred regardless of whether the property is rented, such as:

  • Mortgage interest
  • Real estate taxes
  • Insurance
  • Utilities
  • Repairs and maintenance
  • Landscaping and security
  • Depreciation of the property

Since these expenses relate to both personal and rental use, they must be prorated. Only the portion attributable to rental use is deductible as a rental expense. The personal portion may be deductible elsewhere (for example, mortgage interest and real estate taxes), subject to current tax law limitations.

To calculate the deductible portion, multiply the expense by a fraction equal to:

Rental days ÷ total days of personal and rental use

Example

Let’s say you owned your home for the full year and rented it for 30 days while using it personally for 45 days. In addition to deducting 100% of direct rental expenses, you could deduct 40% of indirect expenses (30 rental days ÷ 75 total use days) against rental income. If rental expenses exceed rental income, deductions may be limited under passive activity loss rules, with excess losses generally carried forward to future years.

Additional Considerations

Short-term rental platforms such as Airbnb and VRBO may issue Form 1099-K or 1099-NEC, which reports gross rental payments received. Good recordkeeping is essential to properly report income and support deductible expenses. Depreciation deductions taken overtime may also affect taxable income when the property is eventually sold.