Turning your home or investment property into an Airbnb sounds like a win-win: steady income, tax deductions and a foothold in a booming industry. But can a short-term rental really work as a tax shelter, or will it cause more stress than it’s worth?

The short answer: Airbnb owners can unlock significant deductions, but navigating IRS rules, local regulations and constant guest turnover can make short-term rentals more work than many expect.

Understanding short-term rentals

Rental income, even from just a single night, is taxable. If you rent out a property, you must report all rent payments, advance fees and security deposits kept as income. This includes properties you purchase to rent as an Airbnb or even your personal residence. The only exception is the 14-day rule, often called the Masters Exemption. If you rent out your personal residence for 14 days or fewer in a year, the income is entirely tax-free. This loophole works best for people in high-demand areas hosting big events. However, if you exceed the 14-day rental period, then every dollar of rental income becomes taxable.

Material participation and tax deductions

Many Airbnb hosts mistakenly assume rental losses can be claimed as a tax deduction to reduce their Form W-2 income earned from their day job. However, rental activity is typically considered passive, meaning losses can only offset other passive income (like stock sales), unless you qualify for an exception. While owning and renting an Airbnb can seem like a great deal, you’ll need to qualify under the active participation exception in order to benefit from any eligible tax deductions. To meet this requirement, the taxpayer must:

• Own at least 10% of the rental and have substantial involvement in managing the rental
• Meet the 10% ownership requirement for the entire tax year

So, if you rent your property on a short-term basis, generally with average stays of seven days or fewer, and you spend at least 100 hours a year managing it (and more time than anyone else), you can treat your rental income as active income. You will be able to claim expenses such as insurance costs, cleaning fees, mortgage interest, and depreciation. If those deductions generate a loss (meaning more expenses than rental income), you can offset your regular W-2 salary or other earned income up to $25,000 for a married filing joint couple. There is an income phase-out limit of $100,000 that can reduce the amount of loss you will be able to claim.

That’s the heart of the much-hyped short-term rental “loophole”. It requires careful documentation of your time spent on the property. Without records proving active participation, the IRS may reclassify your activity as passive, which means you cannot deduct your rental losses against your income.

The real tax shelter

Depreciation is one of the most valuable deductions for short-term rental owners who materially participate in their rental management. For example, if you buy a $300,000 property (excluding land value), you can deduct roughly $10,900 each year over 27.5 years, the number of years it takes to depreciate a rental real estate property. That deduction alone can offset much of your rental income or other W-2 income if you have an overall loss against your rental income.

Some landlords use bonus depreciation and cost segregation studies to accelerate deductions by allocating more value to short-lived components of the rental property, like appliances or fixtures. These strategies can create massive upfront write-offs, but they’re complex and should be discussed with a tax professional.

Headaches to consider

While the tax benefits are appealing, owning a short-term rental isn’t easy money. Key challenges include:

• Constant turnover: Frequent guest stays mean more cleaning, maintenance, and potential repairs.
• Self-employment tax: If you offer “substantial services” such as cleaning during stays, concierge features or meals, your rental income could be reclassified as self-employment income, triggering up to 15.3% additional tax.
• Local laws: Many cities limit or ban short-term rentals or require costly permits.
• Occupancy risk: Unlike long-term rentals, occupancy rates for short-term properties can fluctuate dramatically with the seasons or economic conditions.
• Tax complexity: Short-term rentals come with unique IRS rules, including recordkeeping for material participation, depreciation recapture if you sell and potential audits if you misapply deductions.

Is an Airbnb worth it?

A short-term rental can make sense if you:

• Have time to actively manage the property or can hire help while still meeting material participation tests
• Live in a location with strong year-round demand for tourists or business travelers
• Understand and follow local rental regulations
• Are prepared to keep meticulous records of income, expenses and hours worked

If you can meet these requirements, the combination of rental income and tax deductions can create real financial benefits. But if you’re hoping for an easy, hands-off investment, a long-term rental or other strategies may better fit your goals.

Action steps for Airbnb hosts

• Track your hours: Keep a detailed log of time spent managing your property to support material participation claims.
• Understand services: Offering too many services could mean self-employment tax.
• Research local rules: Ensure your city or county allows short-term rentals.
• Consult a tax professional: Discuss whether depreciation strategies, bonus depreciation or cost segregation studies could benefit you.

Bottom line

Airbnb and other short-term rentals can offer big tax deductions, but they’re far from a passive investment. For some, the tax breaks and income potential outweigh the headaches. For others, the demands of constant turnover and tax complexity make short-term rentals more stressful than they’re worth.

When a client is ready to sell their business, your professional tax guidance can make or break the outcome. Understanding the structure of the transaction and proactively identifying planning opportunities ensures your client is positioned to walk away with optimal after-tax proceeds.

Below, you’ll find a few of the top questions and answers from a recent webinar on the topic. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.

Q: How is the sale of a sole proprietorship taxed?

A: Sole proprietorship sales are treated as the sale of the business’s assets (an asset sale), taxing each asset based on its character. Inventory is reported as ordinary income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Depreciable assets go on Form 4797, Sales of Business Property, and may trigger depreciation recapture. Goodwill is generally a capital asset. Both parties usually file Form 8594, Asset Acquisition Statement Under Section 1060, to allocate the purchase price.

Q: How is goodwill taxed when selling a business?

A: Goodwill is generally treated as a capital asset, resulting in long-term capital gain if held for over one year. If amortization was taken, recapture rules may apply, creating ordinary income. Entity-owned goodwill is reported on Form 4797. If personal goodwill exists, the seller may report it directly on Form 8949, Sales and Other Dispositions of Capital Assets, which flows to Schedule D (Form 1040), Capital Gains and Losses.

For a deeper dive into goodwill treatment in S corporation sales, see our article What Happens When an S Corporation Is Sold? from TAXPRO Monthly, August 2024.

Q: What’s the tax difference between asset and stock sales?

A: In an asset sale, each asset is taxed separately based on its type, and depreciation recapture may apply. Buyers benefit because they can assign the purchase price to the individual assets acquired, increasing their basis and enabling larger depreciation deductions in the future. In a stock sale, the buyer purchases ownership in the entity (the stock), and the company continues to own its assets with no change in basis or depreciation schedules. Stock sales usually result in capital gains for the seller and are often preferred by the seller for favorable tax treatment.

Q: Can the installment method be used when selling a business?

A: Yes, but only for eligible assets. Inventory, accounts receivable and depreciation recapture must be reported as ordinary income in the year of sale. Capital assets like equipment, buildings or goodwill may qualify for installment reporting. Use Form 6252, Installment Sale Income, to report installment income for those eligible assets.

To learn more about the tax implications of selling a business, watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.

The IRS has issued a new fact sheet outlining guidance on four major tax deductions introduced by the One Big Beautiful Bill Act (OBBBA). This tax resource helps tax preparers interpret and apply the latest OBBBA updates, including deductions for employee overtime, reported tips, the newly created senior tax deduction and deductible interest on car loans.

The intent of Congress behind IRC Section 225, as introduced in H.R. 1, is becoming clearer, but not without debate. The definitions and transitional rules and reporting implications have backing from the IRS, major payroll providers and the Bipartisan Policy Center. Still, some areas remain unsettled and require further clarification, specifically the definition of “qualified overtime”. In the absence of additional guidance, here’s our best interpretation based on what’s currently available. 

1. Definition: “qualified overtime compensation” 

• Only the premium portion of overtime pay counts, that is, the amount over the regular rate, as required under FLSA § 7 (e.g., 0.5 × the regular pay)  
  • Example: If regular pay is $20/hr. and overtime is $30/hr., then $10/hr. × overtime hours = qualified overtime. 

2. Transitional rule for 2025  

• The deduction applies retroactively to Jan. 1, 2025, and remains effective through 2028.
• For tax year 2025 only, employers may use “any reasonable method” (per Treasury guidance) to estimate qualified overtime and tips reported on W-2s.
• Treasury may later define acceptable methods; employers choosing not to include reasonable estimates will still comply, but employees may miss the deduction unless it is adjusted later.

3. Reporting and payroll implications 

• Employers should:
  • Track overtime hours and calculate the premium portion per employee
    • For 2025, pick a reasonable estimation method (e.g., percentage of overtime hours × average premium) for payroll postings.
  • Voluntarily report estimated qualified overtime on Form W-2, separate from total earnings
• After Treasury issues guidance, employers might adjust W-2s or provide corrected Forms 1099 for affected employees.
• For 2026 and beyond, payroll systems should natively compute and separate qualified overtime every week, consistent with the FLSA.

4. Example: Jane the barista working during the 2025 transition period 

• Jane’s weekly work details:
  • 50 hours, including 10 hours of overtime
  • Regular pay rate is $20
  • Total pay = $1,200 (40 hours x $20 = $800) + (10 hours x $30 = $300)
• Qualified overtime = $100 (10 hours x $10 premium above $20 regular hourly rate)
  • W-2, Box 14 (or separate code), shows $100 qualified overtime (estimate OK)
  • For 2026 and beyond, accurately compute and report the actual $100 per week.
• Tax outcome: Jane deducts qualified overtime from AGI, subject to the annual cap ($12,500 for individuals, $25,000 for joint filers).

5. Why the transitional rule matters 

• Provides administrative relief for employers adapting payroll systems mid-year
• Ensures employees aren’t deprived of the benefit simply because retroactive calculations weren’t built into payroll systems from Jan. 1
• Reliance on estimates means employees should review W-2s and may need to make amendments once final guidance is released

6. Next steps for employers

1. Select a reasonable estimation method now (e.g., proportional allocation)
2. Track and report qualified overtime on 2025 W-2s accordingly
3. Monitor Treasury releases for official guidance
4. Upgrade payroll systems for accurate 2026 reporting

We’ve updated our tax summary to reflect this new information.

NATP is closely following the released guidance and will communicate with our members as additional details are provided.

Become a member of NATP to receive important, timely information like this through our news alerts so you can keep working while we keep an eye on the changes that affect your business.