What can you deduct on a short-term rental, and how do the tax rules work in 2026?

Short-term rental tax deductions cover mortgage interest, property taxes, depreciation, repairs, supplies, platform fees, and utilities allocated to rental use. Which deductions you can claim, and whether losses can offset your other income, depends on how many days you rent the property, how many days you use it personally, and whether you materially participate in the activity.

What operating expenses can you actually deduct?

The core deductible costs for a short-term rental include:

• Mortgage interest allocated to rental use
• Property taxes (fully deductible for investment properties, not subject to the $10,000 SALT cap that applies to personal residences)
• Insurance premiums
• Repairs and maintenance
• Supplies and consumables for guests
• Platform fees paid to Airbnb, VRBO, or similar services
• Utilities allocated to rental days

One rule that trips up many owners is the difference between repairs and improvements. Repairs, things like fixing a broken faucet or repainting a room, are currently deductible in the year you pay them. Improvements, such as adding a new roof or replacing a deck, must be capitalized and depreciated over time. Misclassifying an improvement as a repair is one of the most common errors our team sees in rental property returns.

If you use the property personally for part of the year, expenses must be prorated based on rental days versus personal use days. Mortgage interest for personal-use days moves to Schedule A rather than Schedule E, and the deductible share of every other expense shrinks proportionally. IRS Publication 527 governs how that allocation works in practice.

How does personal use affect what you can deduct?

Under IRC §280A(d)(1), a property is treated as a personal residence when your personal use exceeds the greater of 14 days or 10% of the days you rent it at a fair rental price. Once you cross that threshold, §280A(c)(5) caps your total rental deductions at gross rental income. You cannot create a net loss.

Personal use includes days used by family members, days given to anyone below fair market rent, and days under home-exchange or barter arrangements. Days you spend primarily on repairs and maintenance do not count as personal use, which gives active owners some flexibility in how they track their time.

There is also a separate rule worth knowing: if you rent the property for 14 days or fewer in the entire year, the Augusta Rule under IRC §280A(g) lets you exclude that rental income from federal tax entirely. The trade-off is that no deductions are allowed against that excluded income. Once you hit day 15 of renting, income must be reported and the full deduction rules apply.

What is depreciation worth on a short-term rental in 2026?

The building structure itself depreciates over 27.5 years using the straight-line method under the General Depreciation System, as outlined in IRS Publication 527. That steady annual deduction adds up, but the bigger opportunity in 2026 is bonus depreciation.

The One Big Beautiful Bill Act, signed July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. IRS Notice 2026-11 addresses the mechanics of that permanent deduction. The building structure itself does not qualify, but a cost segregation study can reclassify specific components, such as appliances, carpet, rental furniture, driveways, fencing, and landscaping, into 5-year or 15-year property categories that are fully expensible in year one.

A cost segregation study typically identifies 25 to 30% of a property's purchase price as bonus-eligible assets. At a 37% marginal rate, a $162,000 year-one bonus depreciation deduction can generate approximately $63,500 in immediate tax savings. For a deeper look at how those numbers work, see our post on cost seg benefits for rental property owners.

Qualified Improvement Property is another category worth flagging. For STRs with average guest stays of 30 days or less, interior renovation costs can qualify for immediate expensing under bonus depreciation, which means a kitchen renovation could become a first-year deduction rather than a 27.5-year write-off.

Can short-term rental losses offset W-2 income?

This is where short term rental tax deductions become especially valuable for high-income earners. IRC §469 generally classifies rental real estate as passive, meaning losses can only offset other passive income, not your salary or business income. However, Treasury Regulation §1.469-1T(e)(3)(ii) creates an exception: an STR with an average guest stay of 7 days or fewer falls outside the passive-activity definition of a rental.

To use that exception, you must also meet a material participation test for the activity. The most commonly used thresholds are 500 hours of personal participation annually, or 100 hours when no one else participates more. When both the average-stay condition and a material participation test are satisfied, STR losses become non-passive and can directly offset W-2 or other ordinary income. Our guide on how the short-term rental loophole works for high earners covers the mechanics in detail, and our post on material participation for short-term rentals walks through each qualifying test.

One ceiling to keep in mind: the §461(l) excess business loss limit for 2026 is $256,000 for single filers and $512,000 for joint filers. Losses above that threshold do not disappear; they become a net operating loss carryforward with no expiration. In future years, however, those carryforwards can only offset 80% of taxable income.

An alternative path for investors who qualify is Real Estate Professional Status. That requires more than 50% of all your personal services annually to be in real property businesses, plus more than 750 hours logged in those activities. Meeting that standard removes the passive-loss cap entirely, allowing unlimited rental losses against ordinary income.

Does the 20% QBI deduction apply to short-term rentals?

Section 199A is now permanent under the One Big Beautiful Bill Act, giving eligible STR owners an ongoing 20% deduction on net qualified business income. Whether a specific STR qualifies depends on facts and circumstances, and the IRS has not issued a bright-line rule covering every situation.

One factor that changes the analysis is providing substantial services to guests, such as daily housekeeping during stays, concierge services, or meals. That level of service can shift the activity from Schedule E rental income to Schedule C self-employment income. Schedule C status triggers 15.3% self-employment tax, but it may also make the QBI deduction easier to claim. For most STR owners in the 37% bracket, the bonus depreciation savings from cost segregation still outweigh any lost QBI deduction, but both numbers should be modeled before filing. High-income investors above the §199A threshold may be able to raise their QBI deduction cap by adding properties or increasing qualified property basis through a cost segregation study.

What audit risks should short-term rental owners watch for in 2026?

The IRS tracks STR income through Form 1099-K reporting from platforms like Airbnb and VRBO. Failing to report that income is a known audit trigger, and the IRS cross-references platform data against filed returns.

Beyond unreported income, the most common audit risks include:

• Claiming personal-use days as rental days
• Failing to prorate expenses correctly between personal and rental use
• Overstating material participation hours without contemporaneous records
• Treating capital improvements as currently deductible repairs

Documentation is not optional. If you are claiming the 7-day loophole and material participation, you need a contemporaneous log of your hours, not a reconstruction at tax time. The passive activity loss rules for rental property are specific about what evidence holds up under examination.

For a broader look at how these deductions fit into a full rental property strategy, see our post on rental property tax strategies for 2026. The rules interact in ways that make sequencing and documentation as important as the deductions themselves.