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Short-term rental taxes and the IRS: Schedule E or C, the 7-day rule, bonus depreciation and Form 1099-K

Sergej Sitki · founder of ReceptionGO and host
Published October 18, 2026 · 7 min read

General information, not legal or tax advice. Rules change often and vary by state, county and city — confirm your situation with the local agency or a CPA.

The IRS taxes short-term rental income on Schedule E unless you provide hotel-like services (then Schedule C and self-employment tax). If your average stay is 7 days or less and you materially participate, losses — often from depreciation — can offset other income. The 2025 tax law restored 100% bonus depreciation and the $20,000 / 200-transaction Form 1099-K threshold.

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A vacation rental can be the most tax-efficient property you own, or a trap of unexpected self-employment tax and disallowed losses. The difference comes down to a handful of tests: how many days you rent, how many you use yourself, how long guests stay, what services you provide and how much time you put in. Here is how they fit together for the 2026 tax year, including what the 2025 tax law changed.

Step 1: how many days?

Personal use includes days used by family members, and days rented below fair market rent. Days spent repairing and maintaining the property do not count as personal use.

Step 2: Schedule E or Schedule C?

Most hosts report on Schedule E: rental income, no self-employment tax. You move to Schedule C when you provide substantial services primarily for the guests’ convenience — the kind a hotel provides: daily housekeeping during the stay, meals, transport, concierge. Cleaning between guests, linens and Wi-Fi do not count. Schedule C brings 15.3% self-employment tax, but also makes it clearer that you run a business.

Step 3: the 7-day rule and material participation

Under the passive activity rules, a property where the average period of customer use is 7 days or less is not a “rental activity”. It is treated like any other business. That matters because:

• If you materially participate, losses are non-passive and can offset wages, business or investment income.
• If you do not, losses stay passive and are carried forward against future passive income.
• The $25,000 allowance for “active participation” in rental real estate does not apply, because it is not a rental activity.

The material participation tests most hosts rely on:

1. 500+ hours a year in the activity; or
2. 100+ hours and more than anyone else, including cleaners and co-hosts; or
3. your participation is substantially all the participation in the activity.

Depreciation and the 2025 tax law

The building (not the land) is depreciated over its recovery period. A rental used mostly by transient guests is generally treated as nonresidential real property (39 years) rather than residential (27.5 years) — ask your CPA which applies to yours. Contents and components are faster:

• Furniture, appliances and fixtures: 5–7 years.
• Land improvements — driveways, landscaping, fencing, pools: 15 years.
• Bonus depreciation: the One Big Beautiful Bill Act (July 2025) restored 100% first-year bonus depreciation for qualifying property acquired after January 19, 2025, so those shorter-life assets can be deducted at once.

A cost segregation study identifies those components in the purchase price — often 20–30% of it. With the 7-day rule and material participation, that first-year deduction can offset other income. Without them, it becomes a passive loss carried forward.

The 2025 law also made the 20% qualified business income (QBI) deduction permanent; a rental that rises to a trade or business may qualify.

Form 1099-K and what the IRS sees

The 2025 law reset the Form 1099-K threshold to more than $20,000 and more than 200 transactions a year, scrapping the planned $600 threshold. Many smaller hosts will no longer receive one. It changes nothing about what is taxable: every dollar of rental income must be reported. Watch for:

• Gross vs net: a 1099-K shows gross payments, before platform fees. Deduct the fees as an expense.
• Taxes collected by the platform: lodging taxes Airbnb collects and remits are not your income; exclude them.
• State thresholds: some states require platforms to report at lower amounts.

Deductible expenses

• Platform service fees and payment processing fees.
• Cleaning, laundry, supplies, toiletries.
• Utilities, internet, streaming services for guests.
• Insurance, property tax, HOA dues, mortgage interest (rental share).
• Repairs and maintenance; software such as channel managers, smart locks and guest messaging.
• Licenses, permits and local registration fees.
• Travel to the property for management (carefully documented).

Records to keep

1. Every reservation with dates and nights — to compute rental days and the average length of stay.
2. Personal-use days, marked separately.
3. Income by channel, gross and net, reconciled to payouts and 1099-Ks.
4. Expenses with receipts.
5. A contemporaneous time log for material participation.

Income tax is separate from the lodging taxes you collect from guests — see the occupancy tax guide. And the platform fees you deduct are explained in Airbnb, Vrbo and Booking.com fees for hosts.