STR Tax Strategies: Year-End Planning & Deductions Guide

Tax planning is an essential component of STR investment success. The difference between a well-structured tax approach and a haphazard one can be tens of thousands of dollars over time. December is your last opportunity to implement strategies that reduce your current year tax liability, so understanding your options is critical. For a deeper dive into STR-specific tax strategies throughout the year, explore our comprehensive STR Tax Strategies Guide.

This guide covers the major tax considerations for short-term rental investors, from deductible expenses to depreciation strategies to year-end planning tactics. While this information provides a solid foundation, always consult with a tax professional who understands STR taxation for your specific situation.

STR Tax Classification: Why It Matters

How your STR activity is classified for tax purposes affects everything from which deductions you can take to whether losses can offset other income. The IRS looks at several factors.

Rental Activity vs. Business Activity

If your average guest stay is 7 days or less, your STR is generally treated as a business activity rather than passive rental activity. This is significant because:

• Business Activity: Subject to self-employment tax on net income, but losses may be fully deductible against other income if you materially participate.
• Rental Activity: No self-employment tax, but passive activity loss rules may limit your ability to deduct losses against W-2 or other active income.

Material Participation

For STRs classified as business activities, material participation determines whether losses can offset other income. The IRS has seven tests; meeting any one qualifies you:

1. 500+ hours of participation during the year
2. Substantially all participation in the activity is by you
3. 100+ hours AND no one else participates more
4. Significant participation activities totaling 500+ hours
5. Material participation in 5 of the prior 10 years
6. Personal service activity with material participation in any 3 prior years
7. Facts and circumstances showing regular, continuous, and substantial involvement

Deductible Expenses

Short-term rentals generate numerous deductible expenses. Proper tracking and categorization are essential for maximizing deductions while maintaining IRS compliance.

Common STR Deductions

Category	Examples	Notes
Platform Fees	Airbnb host fees, VRBO fees, channel manager costs	Fully deductible in year paid
Cleaning	Professional cleaning, supplies, laundry service	Fully deductible
Maintenance	Repairs, landscaping, pool service, pest control	Repairs deductible; improvements may need capitalization
Utilities	Electric, gas, water, sewer, trash, internet	Fully deductible (may prorate if personal use)
Insurance	Property insurance, liability, STR-specific coverage	Fully deductible
Property Management	Management fees, co-host fees	Fully deductible
Professional Services	Accounting, legal, tax preparation	Allocate if also for personal matters
Marketing	Photography, website, advertising	Fully deductible
Supplies	Linens, toiletries, kitchen items, welcome amenities	Generally deductible in year purchased
Travel	Mileage to property, travel for property management	Document business purpose
Mortgage Interest	Interest on acquisition debt	Subject to limitations and allocation
Property Taxes	Real estate taxes	Fully deductible against rental income

Repair vs. Improvement

Understanding the distinction is critical:

• Repairs: Maintain property in current condition. Fully deductible in year paid. Examples: fixing a broken faucet, patching drywall, replacing broken window.
• Improvements: Add value, extend useful life, or adapt property to new use. Must be capitalized and depreciated. Examples: new roof, kitchen renovation, adding a bathroom.

De Minimis Safe Harbor

Items costing $2,500 or less (per invoice) can be expensed immediately rather than capitalized, even if they would otherwise be considered improvements. This applies to items like:

• Smart locks and thermostats
• Furniture items
• Appliances under the threshold
• Minor improvements and upgrades

Depreciation Strategies

Depreciation is one of the most powerful tax benefits for STR investors, allowing you to deduct the cost of your property over time even while it potentially appreciates in value.

Standard Depreciation

Residential rental property is depreciated over 27.5 years using the straight-line method. Only the building value (not land) is depreciable. For a property purchased for $400,000 with $100,000 allocated to land:

• Depreciable basis: $300,000
• Annual depreciation: $300,000 / 27.5 = $10,909

Cost Segregation Studies

Cost segregation accelerates depreciation by identifying components that can be depreciated faster than 27.5 years:

• 5-year property: Appliances, carpeting, certain fixtures
• 7-year property: Furniture, office equipment
• 15-year property: Land improvements (driveways, landscaping, fencing)

A cost segregation study typically costs $3,000-7,000 but can generate significant first-year deductions, especially when combined with bonus depreciation.

Bonus Depreciation

Under current law, eligible property can receive bonus depreciation in the first year:

• 2025: 100% bonus depreciation for qualifying property
• 2026: 80% bonus depreciation
• 2027: 60% bonus depreciation
• Phaseout continues through 2027

Year-End Tax Planning Strategies

Accelerate Expenses

If you want to reduce current year taxable income, consider prepaying or accelerating expenses before December 31:

• Prepay January Expenses: Property insurance, property management fees, pest control contracts.
• Stock Supplies: Purchase next year's linens, toiletries, and cleaning supplies now.
• Schedule Repairs: Complete and pay for deferred maintenance before year-end.
• Equipment Purchases: Buy needed furniture, appliances, or equipment to take 2025 depreciation.

Defer Income (If Beneficial)

If you want to push income to next year:

• Delay December invoicing for any non-platform income
• For cash-basis taxpayers, income is recognized when received, not when earned

Review Retirement Contributions

If your STR generates self-employment income:

• SEP-IRA: Contribute up to 25% of net self-employment income (max $69,000 for 2025)
• Solo 401(k): Higher contribution limits possible with employee + employer contributions
• Deadline: SEP-IRA contributions can be made until tax filing deadline (including extensions)

Evaluate Entity Structure

Year-end is a good time to evaluate whether your current structure is optimal:

• Sole Proprietorship: Simplest but offers no liability protection
• LLC: Liability protection with pass-through taxation
• S-Corporation: May save self-employment taxes if income is sufficient

Record Keeping Requirements

Proper documentation is essential for claiming deductions and surviving an audit.

Essential Records to Maintain

• Income Records: Platform 1099s, direct booking records, all rental income
• Expense Receipts: Every deductible expense with date, amount, vendor, and business purpose
• Mileage Log: Date, destination, purpose, and miles for each trip
• Time Log: Hours spent on STR activities if claiming material participation
• Improvement Records: Invoices, permits, and before/after photos for capital improvements
• Asset Records: Purchase dates and costs for all furniture, equipment, and improvements

Record Retention

Keep tax records for at least 7 years. Keep property acquisition documents and improvement records for as long as you own the property plus 7 years after sale.

Common STR Tax Mistakes

Mistakes to Avoid

• Mixing Personal and Business: Using the same accounts for personal and STR expenses complicates tracking and raises audit flags.
• Ignoring Personal Use Rules: Personal use of your STR can limit deductions. Track and allocate properly.
• Forgetting State and Local Taxes: STRs often have occupancy taxes, sales taxes, and local licensing fees. Non-compliance creates penalties.
• Missing Depreciation: Depreciation is not optional. Failing to take it reduces your basis anyway (depreciation "allowed or allowable").
• Poor Documentation: Estimates and round numbers invite scrutiny. Keep detailed records.

Working with Tax Professionals

STR taxation is complex enough that working with a knowledgeable professional often pays for itself.

Finding the Right CPA

• Look for experience specifically with short-term rentals and real estate
• Ask about their familiarity with cost segregation and STR-specific issues
• Request references from other STR investors
• Discuss their availability for year-round questions, not just tax season

What to Bring to Your Tax Meeting

• All 1099 forms from platforms
• Profit and loss statement
• List of all capital purchases and improvements
• Property acquisition documents
• Material participation hour log
• Questions about upcoming purchases or changes