How Are Airbnb and VRBO Rental Income Taxed?

Income from Airbnb and VRBO short-term rentals is taxable at the federal level, and the way it is reported depends on the services you provide, how many days you rent the property, and your level of involvement. Understanding the correct reporting method is important because it affects which deductions you can claim, whether you owe self-employment tax, and how losses are treated under the passive activity rules.

The 14-Day Rule: Tax-Free Rental Income

Under IRC Section 280A(g), if you rent your property for 14 days or fewer during the tax year, the rental income is completely excluded from your gross income and does not need to be reported on your tax return. This is sometimes called the "Masters Rule" because homeowners in Augusta, Georgia, have long rented their homes during the Masters golf tournament without tax consequences. However, if you use this exclusion, you also cannot deduct any expenses attributable to the rental use. This provision applies regardless of how much income you earn -- even if you charge $5,000 per night for 14 nights, the $70,000 is tax-free.

Schedule E vs. Schedule C: The Reporting Question

For rentals exceeding 14 days, the key question is whether to report income on Schedule E (Supplemental Income and Loss) or Schedule C (Profit or Loss from Business). The answer depends on the level of services you provide to guests.

Schedule E is used when you rent the property and provide only basic services -- providing the space, basic furnishings, linens, and routine cleaning between guests. Most traditional landlord services fall into this category. The majority of Airbnb and VRBO hosts report on Schedule E because their primary offering is the use of the property itself.

Schedule C is required when you provide "substantial services" in connection with the rental that are primarily for the guest's convenience. Substantial services include daily maid service, concierge services, guided tours, meals, transportation, and similar hotel-like services. If you provide these services, the IRS treats the activity as a business rather than a rental, and income is reported on Schedule C. The critical distinction is that Schedule C income is subject to self-employment tax (15.3% on the first $168,600 of net earnings in 2024, plus 2.9% on amounts above that threshold), while Schedule E income is not.

Deductible Expenses

Regardless of which schedule you use, you can deduct ordinary and necessary expenses associated with the rental activity. Common deductions include mortgage interest, property taxes, insurance premiums, utilities, cleaning fees and supplies, platform fees (Airbnb service fees, VRBO commissions), repairs and maintenance, property management fees, advertising costs, furnishings (depreciated or expensed under the de minimis safe harbor), building depreciation, and travel expenses to manage the property. All shared expenses must be allocated between personal and rental use.

Under IRC Section 280A(e), if your personal use exceeds the greater of 14 days or 10% of rental days, rental expenses (other than mortgage interest and property taxes) can only be deducted to the extent of rental income -- they cannot create a loss.

Platform Reporting: Form 1099-K

Airbnb, VRBO, and other platforms report gross rental income to the IRS on Form 1099-K. Under the American Rescue Plan Act, the reporting threshold was lowered to $600 in gross transactions (though implementation has been delayed, with the IRS phasing in a $5,000 threshold for 2024). The 1099-K reports gross amounts before platform fees and expenses, so your reported income on the 1099-K will be higher than the net amount deposited in your bank account. Make sure to deduct platform fees as an expense on your return to avoid overstating income.

Estimated Tax Payments

Unlike W-2 income, short-term rental income does not have taxes withheld at the source. If your rental activity generates significant net income, you may need to make quarterly estimated tax payments using Form 1040-ES to avoid underpayment penalties under IRC Section 6654. The safe harbor is to pay at least 100% of your prior year's total tax liability (110% if your AGI exceeds $150,000) or 90% of the current year's tax liability through withholding and estimated payments.

State Income Tax Considerations

Most states tax short-term rental income. If your STR is in a different state than your home, you will likely need to file a nonresident state return in the property's state. Your home state may provide a credit for taxes paid to other states. States with no income tax -- such as Florida, Texas, Nevada, and Wyoming -- do not impose state income tax on rental income.

Proper tax reporting for Airbnb and VRBO income requires attention to detail. A CPA experienced in short-term rental taxation ensures you report correctly, claim every available deduction, and avoid self-employment tax where it does not apply.

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This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional regarding your specific circumstances. AE Tax Advisors, 935 Lake Elmo Dr, Suite B, Billings, MT 59105. Phone: (631) 614-5762.