Understanding taxes on vacation rental income is important for maximizing your earnings and staying compliant if you own a vacation rental. In 2025, the IRS continues to treat short-term rental income as taxable, whether you’re renting out a spare room or an entire property. Hosts can unlock major tax benefits by deducting expenses like cleaning fees, repairs, and mortgage interest.
However, the rules around personal use, “fair rental days,” and passive income classification can quickly complicate things. This guide breaks down everything you need to know about reporting, deductions, and smart tax strategies for your vacation rental business.
Key takeaways
- If you rent your property for more than 14 days in a year, all rental income—whether from Airbnb, VRBO, or direct bookings—must be reported to the IRS.
- Eligible write-offs include mortgage interest, utilities, maintenance, cleaning, repairs, depreciation, and property taxes. These vacation home tax benefits can significantly reduce your taxable rental income.
- To avoid missed deductions, track income and expenses as they occur. Baselane’s integrated banking and accounting helps automate transaction tagging, simplify security deposit accounting, and generate tax-ready reports.
- In addition to federal taxes, many states charge occupancy or lodging taxes. For example, Texas imposes a 6% occupancy tax on short-term rentals. Always check local regulations and stay current with changes.
- Vacation rental taxes can get complicated. Especially with depreciation thresholds. A CPA can advise on your eligibility for write-offs, help with capital gains tax on holiday cottages, and make sure you’re staying compliant.
- Thinking of hiring a manager to oversee your rental? Learn how much property managers charge so you can budget accordingly and understand what services may be deductible.
What you should know about taxes on vacation rental income
Owning a vacation home that generates income, whether through Airbnb, VRBO, or direct bookings, can be both rewarding and financially smart. But once you start earning rental income, your property becomes subject to a unique set of vacation rental tax rules. Understanding these rules is essential for staying compliant, avoiding penalties, and maximizing your eligible deductions.
Here’s what every vacation rental owner should know:
Rental income must be reported
You must report vacation rental income to the IRS if you rent the property for more than 14 days in a year. This applies whether you’re using a third-party platform or booking directly with guests.
You can deduct eligible expenses
If your vacation home qualifies as a rental property, you can deduct a wide range of expenses to reduce your taxable income, including:
- Mortgage interest
- Insurance premiums (homeowners, liability, etc.)
- Utilities and internet for the rental
- Cleaning and maintenance fees (including supplies)
- Repairs and upkeep to keep the property in good condition
- Hosting fees and commissions (Airbnb/Vrbo service fees)
- Property management fees if you pay a manager or co-host
- Depreciation of the property and furniture
- Advertising and marketing for your listing
- Travel expenses to inspect or maintain the rental
These deductions can be significant. Costs such as platform service fees, cleaning, property management, and insurance typically consume about 25–40% of a host’s rental revenue. For example, if you gross $50,000 in rents but have $30,000 in expenses, you’re taxed only on the $20,000 net profit.
Stay organized to maximize deductions
The IRS expects clear documentation, so keep detailed records of rental income, expenses, usage logs, and receipts. Using accounting software like Baselane can help automate income tracking, categorize expenses by Schedule E, and simplify tax prep with reports.
Understanding IRS tax rules on vacation homes
The Internal Revenue Service (IRS) sets clear guidelines for what qualifies as vacation rental income and what deductions you can claim. These tax rules are vital for ensuring you comply with tax laws while taking full advantage of available benefits.
What are the IRS rules on vacation homes?
According to the IRS:
- If you rent out your home, apartment, cottage, or even a cabin for more than 14 days in a year, you must report the rental income on your tax return.
- If you use the property personally for more than the greater of 14 days or 10% of the total days it’s rented at a fair rental price, special limits apply. These limits affect how much of your expenses you can deduct against your rental income.
In addition:
- Minimal rental use: If you rent the property for 14 days or fewer during the year, you don’t have to report the rental income or deduct any expenses.
- Mixed-use properties: If the property is used for both personal and rental purposes, you must allocate expenses proportionally between personal and rental use based on the number of days used for each purpose.
- Depreciation: You can only depreciate the portion of the property used for rental, not personal use.
- Rental losses: If your rental expenses exceed rental income, your loss may be limited by at-risk rules and passive activity loss rules.
Even if you can’t deduct all your expenses in the current year, you may be able to carry forward unused expenses to future tax years.
Key terms to know
- Rental income: Money you earn from renting out your property, required to be reported on Schedule E (Form 1040).
- Vacation rental income tax: The tax imposed on profits earned from short-term or vacation property rentals.
- Vacation home tax rules: IRS guidelines determine how income and expenses are reported based on rental and personal use.
- Personal vs. rental use: Proper allocation of expenses is crucial when a property serves both purposes.
- Net investment income tax (NIIT): Some vacation rental income may also be subject to the NIIT, depending on your total income level.
Vacation rental tax rules and regulations
Beyond federal regulations, understanding your local and state tax obligations is important. Vacation home rental tax rules can vary significantly depending on where your property is located.
Federal vs. state regulations
Here is a table showing the different guidelines for federal and state taxes.
| Aspect | Federal Guidelines | State Guidelines |
|---|---|---|
| Income Reporting | Report all rental income if rented for more than 14 days. | Varies; some states require additional forms or local registration. |
| Expense Deductions | Only expenses related to rental activity are deductible. | Some states offer extra deductions or credits. |
| Depreciation | Prorated based on the rental percentage. | Often follows federal rules, but may have additional state-specific rules. |
| Local Occupancy Taxes | Not managed by the IRS. | Frequently imposed by local jurisdictions. |
Tax percentage on vacation rental income by state
When it comes to the tax percentage on rental income, the percentage you owe can vary widely depending on your property’s location. While the IRS sets federal income tax rules, each state and often local jurisdictions can impose their rental taxes, such as occupancy or lodging taxes. Some areas charge as little as 3%, while others, like California, can add 12% or more on top of your rental earnings.
To manage these varying rates, it’s essential to stay organized with the best accounting software for rental properties or a QuickBooks alternative designed for landlords. Staying proactive can also help you track deductible expenses, maximize landlord tax deductions, and better understand strategies.
Vacation rental tax rate by state (occupancy tax)
Below is a table of vacation rental tax by state.
| State | Approximate Occupancy/Short‑Term Rental Tax Rate | Notes |
|---|---|---|
| Alabama | 4% | Varies by county/local jurisdiction |
| Alaska | 0% | No state sales tax; local fees may apply |
| Arizona | 5.5% | Local jurisdictions may impose additional taxes |
| Arkansas | 6.5% | Some local variations |
| California | 12% | Rates vary widely by city |
| Colorado | 2.9% | City‐specific taxes may apply |
| Connecticut | 15% | Some areas impose occupancy taxes |
| Delaware | 8% | No state sales tax; local fees may apply |
| Florida | 6% | Includes state sales tax plus discretionary/local surtaxes |
| Georgia | 4% | Local taxes vary |
| Hawaii | 14.25% | Varies by municipality |
| Idaho | 6% | Local rates may vary |
| Illinois | 6% | E.g. Chicago rates are higher; statewide rates vary |
| Indiana | 7% | Local occupancy taxes apply in some areas |
| Iowa | 5% | Local variations |
| Kansas | 6.5% | Local jurisdictions may add additional taxes |
| Kentucky | 6% | Local taxes vary |
| Louisiana | 4.45% | Local variations apply |
| Maine | 9% | Local taxes may be added |
| Maryland | 6% | Varies by locality |
| Massachusetts | 5.7% | Local differences may apply |
| Michigan | 6% | Typically lower rates |
| Minnesota | 6.875% | Local variations |
| Mississippi | 7% | Local taxes vary |
| Missouri | 4.225% | Local occupancy taxes apply |
| Montana | 4% | No statewide sales tax; local fees may apply |
| Nebraska | 6.5% | Local jurisdictions may vary |
| Nevada | 13% | Statewide lodging tax; local rates can be higher |
| New Hampshire | 8.5% | No state sales tax; local fees may apply |
| New Jersey | 6.625% | Local variations |
| New Mexico | 5.125% | Local jurisdictions add additional taxes |
| New York | 4% | E.g. New York City total is ~14.75%; rates vary widely by locality |
| North Carolina | 4.75% | Local occupancy taxes apply |
| North Dakota | 5% | Varies by local jurisdiction |
| Ohio | 5.75% | Local taxes may apply |
| Oklahoma | 4.5% | Local variations |
| Oregon | 1.8% | No state sales tax; local fees may apply |
| Pennsylvania | 6% | Varies by local jurisdiction |
| Rhode Island | 6% | Local occupancy taxes may apply |
| South Carolina | 5% | Varies locally |
| South Dakota | 4.5% | Local variations apply |
| Tennessee | 7% | Local occupancy taxes in some areas |
| Texas | 6% | Local jurisdictions may add additional taxes |
| Utah | 4.7% | |
| Vermont | 9% | Local taxes may apply |
| Virginia | 4.3% | Local occupancy taxes vary |
| Washington | 6.5% | E.g. Seattle ~17.5%; other areas vary |
| West Virginia | 6% | Local jurisdictions may vary |
| Wisconsin | 5% | Local occupancy taxes apply |
| Wyoming | 4% | Local variations apply |
Vacation rental income is subject to federal and, often, state, progressive income taxes, along with additional local taxes or fees. Always verify current rates and regulations with local tax authorities or consult a tax professional for advice specific to your situation.
Calculating taxes on vacation rental income
Calculating your taxable income from a vacation rental property involves several steps. Below is a simplified guide to help you understand the process.
Steps for calculating net vacation rental income
- Determine gross rental income: Total income from renting out your property.
- List all allowable expenses: Include cleaning fees, repairs, maintenance, utilities, and management fees.
- Allocate expenses: If the property is used for personal use part of the year, expenses must be divided accordingly.
- Calculate depreciation: Only for the rental portion of the property.
- Subtract expenses from gross income: The result is your net rental income, which is subject to tax.
Example case study
Case Study: The Johnson Family’s Vacation Home
- Property: Beachfront villa used as a vacation rental for 200 days and personal use for 50 days.
- Gross rental income: $50,000 for the rental period.
- Expenses:
- Cleaning and maintenance: $5,000
- Repairs: $2,000
- Property management fees: $3,000
- Depreciation (prorated): $4,000
- Personal use percentage: 50 / (200 + 50) = 20%
Calculation:
| Description | Amount (USD) | Notes |
|---|---|---|
| Gross Rental Income | $50,000 | - |
| Total Expenses (Full) | $14,000 | - |
| Adjusted Expense (80%) | $11,200 | Only 80% is deductible for rental use |
| Net Rental Income | $50,000 - $11,200 = $38,800 | Subject to vacation rental income tax |
This simplified example demonstrates how to adjust expenses based on personal versus rental use.
How they help:
- Reduce taxable income: By deducting expenses like mortgage interest, property taxes, utilities, repairs, and depreciation, you lower the income that the IRS considers taxable.
- Offset rental profits: If your expenses are high, they might even reduce your rental profits to zero or create a loss, which in some cases can be used to offset other income (subject to IRS passive activity loss rules).
Common vacation rental tax deductions
Owning a vacation rental can offer significant tax advantages that help lower your taxable income and overall liability. Here are the key vacation home tax benefits to know:
- Depreciation deductions: You can depreciate the cost of your rental property (excluding land) over 27.5 years. This non-cash tax deduction for a vacation home can greatly reduce your taxable rental income each year.
- Operating expense deductions: Expenses directly related to operating your property, like utilities, repairs, insurance, property management fees, cleaning services, and supplies, are deductible. Good accounting for rental properties can make tracking these expenses much easier.
- Mortgage interest deduction: If you have a mortgage, the interest you pay is generally deductible, providing another way to lower your rental income taxes.
- Property tax deduction: You can deduct property and lodging taxes paid on your vacation home, helping to further reduce your taxable earnings.
- Travel and maintenance costs: Travel related to managing your rental, along with maintenance expenses, may qualify as deductions. If you handle maintenance yourself, it’s wise to track these through airbnb accounting tools.
- Passive activity losses: If your rental expenses exceed your income, you may be able to offset other passive or, in some cases, even active income (following IRS rules), which is important when considering paying no taxes on rental income.
- Short-term rental tax treatment: Short-term vacation rental tax treatment differs if you heavily use the property personally. If personal use of a vacation rental exceeds the IRS threshold, it can limit your deductions.
- 1031 exchange opportunities: When it’s time to sell, a 1031 exchange lets you defer capital gains on real estate by reinvesting in another qualifying property.
Staying organized and properly categorizing your property maintenance tax deduction expenses ensures you claim every benefit you’re entitled to.
Deductible expenses for vacation rental income tax
Here’s a table showing deductible expenses you can use for your vacation rental.
| Expense Category | Deductible Portion | Notes |
|---|---|---|
| Mortgage interest | Prorated based on rental usage | Personal portion not deductible |
| Property taxes | Rental portion of state/local property taxes (prorated if the property is partly personal-use). | Varies with local regulations |
| Insurance | Rental-related portion | Insurance premiums for coverage on the rental property are deductible to the extent of the property’s rental use. |
| Repairs & maintenance | 100% if solely for rental; prorated if mixed use. | Keep detailed records |
| Utilities | Prorated portion used for rental property (generally 100% if you pay utilities solely for a rental unit; or split between rental vs. personal use if shared). | Include bills for water, electricity, internet, etc. |
| Advertising | 100% deductible – all costs for advertising and marketing the rental property are deductible. | Costs associated with marketing the rental property. |
| Depreciation | Calculated on the rental portion of the property. | Depreciation allows you to deduct the cost of the rental property over time. |
This table serves as a guide, but always consult with a tax professional to maximize your vacation rental tax deductions.
Best practices for managing vacation rental taxes
Managing your vacation rental lodging taxes doesn’t have to be overwhelming. Here are some practical tips to help you stay organized and compliant.
Best practices
- Track income and expenses in real time: Don’t wait until tax season—log every transaction as it happens, even small ones. Track gross income, not just net deposits, to stay IRS-compliant.
- Keep detailed records: Save receipts, invoices, bank statements, and platform payout reports (e.g., Airbnb, VRBO). Good documentation is essential for maximizing deductions and proving expenses if audited.
- Separate personal and rental finances: Use a dedicated bank account and credit card for all rental-related activity. This creates a clean audit trail and avoids mixing business with personal expenses.
- Use landlord-specific accounting tools: Platforms like Baselane automate rent collection, categorize expenses by property, track receipts, and generate tax-ready reports. Tools like this simplify compliance and reduce manual work.
- Understand IRS rules: Familiarize yourself with IRS Topic No. 415 and Publication 527. These cover depreciation, expense limits, and rules for mixed-use properties (e.g., the 14-day rule and “used as a home” test).
- Deduct all eligible expenses: Don’t miss write-offs like mortgage interest, property taxes, cleaning, maintenance, insurance, and depreciation. Depreciation is especially valuable—even though it’s non-cash, it can significantly reduce taxable income.
- Consult a tax professional: Vacation rental taxes can be complex, especially if you provide services or use the property personally. A CPA can help with Schedule E filing, depreciation schedules, and passive activity loss rules.
- Stay current with tax changes: IRS rules evolve. For example, updates to Form 1099-K thresholds or new safe harbor deductions could impact your filing. Subscribe to IRS tax tips or check for changes annually.
Actionable checklist
- Log every rental income source, including gross payments and fees
- Save receipts for repairs, services, utilities, and supplies
- Open a separate bank account and credit card for rental use
- Use software like Baselane to track and categorize expenses
- Monitor rental profit monthly and set aside taxes (20–30%)
- Track personal vs. rental use days for mixed-use compliance
- Claim depreciation annually using IRS Form 4562
- Review Schedule E before filing and match it to 1099-Ks
- Use the latest IRS forms and publications (Topic 415, Pub 527)
- Meet quarterly estimated tax deadlines if applicable
Common pitfalls and mistakes in filing vacation rental taxes
Even experienced property owners can make mistakes when filing their taxes. Here are some common pitfalls to avoid:
- Failing to track expenses: Without detailed records, you might miss out on valuable deductions.
- Incorrectly allocating costs: Mixing personal and rental expenses can lead to errors.
- Overlooking local taxes: Many owners forget local occupancy or tourist taxes.
- Ignoring depreciation rules: Not properly calculating depreciation can result in overpaying taxes.
- Missing deadlines: Late filings can incur penalties.
With the right systems and habits in place, managing vacation rental taxes becomes much easier. Track carefully, automate where possible, and don’t hesitate to get expert advice. You’ll save time, reduce errors, and make the most of your vacation rental’s financial potential.
Example case study
Below is a case study that illustrates how proper tax planning can benefit vacation rental owners.
Case study: Reducing tax liability through vacation rental strategies
Background: In 2023, a couple in Florida converted a second home into a full-time vacation rental on Airbnb. The property was rented out for over 200 days that year, generating $68,000 in gross income. Their goal was to reduce their tax liability while staying compliant with both federal and state rules.
Issue:
Despite strong rental income, the couple underestimated their deductible expenses and failed to properly categorize property use, leading to a surprise tax bill the previous year. They also did not separate business and personal finances, making recordkeeping difficult.
Solution:
With the help of a tax advisor, they implemented the following strategies:
- Prorated deduction planning:
They correctly allocated expenses between personal and rental use since they occasionally used the property for personal vacations. Only the portion of expenses corresponding to rental days (e.g., mortgage interest, property taxes, insurance, utilities) was claimed. This avoided IRS red flags and ensured full deductibility of legitimate business expenses.
- Home office deduction:
Because the couple managed the property themselves, including marketing, guest communications, and accounting, they qualified for the home office deduction. This allowed them to write off a portion of their primary home’s utilities and internet expenses used exclusively for rental management.
- Separate bank account setup:
They opened a dedicated business bank account and a no-fee checking account to track rental income and expenses separately. This simplified year-end reporting and made it easier to calculate net income for Schedule E.
Outcome:
By organizing their finances and applying correct deductions, they reduced their taxable rental income by over $22,000. Their final tax bill was nearly 40% lower than the previous year. More importantly, they avoided potential IRS scrutiny and built a cleaner system for future growth.
Automate vacation rental expense tracking and tax reporting with Baselane
Navigating vacation rental tax rules for vacation rental property can be complex, but good planning and recordkeeping help maximize deductions and reduce your tax bill. Whether it’s vacation rental income tax, holiday home taxes, or state-specific rates, understanding the basics is essential.
Baselane makes it easy. With built-in bookkeeping, auto-tagged transactions by property and Schedule E category, and tax packages, Baselane simplifies your tax prep from start to finish. You can also automate rent collection, separate finances with unlimited virtual accounts, and earn high-yield interest up to 3.35% APY² with no monthly fees, all in one platform.
Open a free Baselane account and take control of your tax reporting today.
FAQs
Owning a vacation rental property comes with several tax advantages, including deductions for mortgage interest, insurance, property taxes, depreciation, and maintenance. These vacation home tax benefits can significantly reduce your taxable income, as long as you properly track income and expenses and meet IRS guidelines.
Yes. If you rent your vacation property for more than 14 days in a calendar year, you are required to report that income to the IRS. Even short-term rentals like Airbnb or Vrbo fall under this rule. Be sure to maintain accurate records and use tools like QuickBooks for landlords or purpose-built rental accounting platforms.
When a property is used for both personal enjoyment and rental income, expenses must be prorated based on usage. This falls under the IRS's fair rental days vs personal use days guidelines. Keeping a detailed usage log is critical to ensure you deduct only the appropriate rental-related costs.
Typical deductions include:
- Mortgage interest
- Property taxes
- Insurance
- Utilities
- Cleaning and maintenance
- Repairs
- Depreciation
Make sure you use the best property tax management software to stay organized.
Yes, many states apply their own income and occupancy taxes. For instance, California and New York have higher income tax rates, while Alaska has no occupancy taxes. Always check your local and state tax requirements to avoid surprises.
You can claim depreciation on the portion of your property used for rental, typically over a 27.5-year period. The IRS provides specific formulas and timelines. This deduction is one of the most powerful vacation home tax benefits available, but must be handled carefully to avoid over- or under-reporting.
Keep detailed documentation, including:
- Rental income logs
- Receipts for expenses
- Bank statements
- Invoices for repairs and property management
- Security deposit details
This will make tax filing easier and protect you in the event of an audit.
Your property must meet the mixed-use rental guidelines, meaning it’s rented for more than 14 days annually and not used excessively for personal purposes. A tax professional can help you confirm if your deductions comply with IRS rules related to owning a vacation rental.
Yes, but only if the trip is directly related to managing, maintaining, or repairing the rental. Personal vacations or mixed-use trips do not qualify. Keep receipts and travel logs, and ensure the primary purpose of the trip is business-related.
Failing to report or misreporting income can result in penalties, interest, and IRS audits. To avoid this, maintain accurate records and use smart accounting tools or integrated rental platforms like Baselane to automate tracking.
It depends on your state and local jurisdiction. Many states and cities require collecting sales or occupancy tax—for example, Texas charges a 6% state occupancy tax on short-term rentals. Check with your state’s tax authority or consult a local CPA to ensure compliance.
Yes. If you sell your vacation home and it doesn’t qualify as a primary residence, you’ll likely owe capital gains tax. This is especially relevant under IRS rules for the sale of vacation rental homes tax rules. The selling holiday home capital gains tax process depends on how long you owned the property and your usage.
