Vacation & Short-Term Rental Accounting: How to Increase Profit

Rental property management for a single vacation or short-term rental property can be a breeze when compared to the complexities of owning a portfolio of rental residences. How rental property owners and entrepreneurs are taxed is impacted when they own property in different states, how each property is classified based on usage, and how that income is routed.

Whether you're considering acquiring a new property or have been grappling with multi-property ownership tax issues for some time, we understand your concerns. You're not alone. Many people and businesses successfully address similar tax challenges regularly.

Use this article to learn how vacation and short-term rentals are classified, bookkeeping challenges and essentials, your tax obligations, and other considerations to help ensure compliance and increase short-term rental profits. 

Defining Vacation and Short-Term Rentals

A guest’s average time renting a property will define its rental category.  

• Short-term rental. This type of rental lasts 30 days or less and is usually associated with vacation, Airbnb, and VRBO-style platforms. 

• Medium-term rental. This type of rental lasts from 1 to 6 months. Typical renters include a business professional in town for a temporary work assignment or a college student studying during the semester. 

• Long-term rental. This type of rental can last 6 months to a year or longer and includes more traditional lease agreements for apartments and other dwellings. 

Income you generate with little effort, such as rent collection, is considered "passive." In contrast, income from more demanding work, such as playing a more substantial role in your rental operations, is considered "non-passive." Your passive and non-passive income from short-term rentals may be deductible on your tax return.

You can deduct passive income losses against your passive income and non-passive income against non-passive income. You cannot deduct passive income losses against your non-passive income and vice versa. 

Short-Term Rental Bookkeeping: Common Challenges

Graduating from a simple spreadsheet to more formal rental bookkeeping integrations is great for tax reporting but not without its challenges for vacation rental owners. Part of the functionality of bookkeeping supports financial reporting and accounting processes by tracking owner statements, financial statements, financial transactions, and refunds. This leads to more efficient financial management and categorizing.

Fluctuating rental income

Because short-term rental properties are impacted by seasonality and demand, pricing and rental income will fluctuate throughout the year.

Tracking fluctuating rental income as part of your bookkeeping activities is more complex than businesses with more consistent income, but it's not impossible. Maintaining your books is a time-consuming, detail-heavy process, but it effectively empowers you to manage finances, such as cash flow. Ensure you're accounting for market fluctuations as you record your fluctuating short-term rental income and spread out rental income throughout the year to compensate for lean financial periods. 

Revenue collection through rental platforms (e.g. Airbnb)

Airbnb charges a 20% service fee to cover their costs for products, services, and support. Airbnb automatically withholds these fees from your payouts, which are typically released 24 hours after an experience.

Airbnb and its fees can impact your books if not recorded properly, leading to an inaccurate view of profits and cash flow. Avoid this common challenge by regularly checking your bank statements against profits you've made from Airbnb and other platforms. 

Independent contractors vs. employees

If you don't use employees, record personnel expenses for the independent contractors you hire to maintain and clean your properties. They may be classified as: 

• Management fees for your property 

• Cleaning fees

• Repair and maintenance

Vacation Rental Bookkeeping Essentials

Separate, dedicated bank accounts

Opening a business bank account for your short-term rental business can save you hours each month and dramatically streamline and improve your tax return preparation activities without the need to automate.

Maintain a separate checking account for your business income and expenses to monitor earnings and spending easily, and you won’t need to scramble for receipts during tax season.

Differentiated tangible and intangible assets

Differentiating between tangible and intangible assets you possess promotes bookkeeping efficiency. An example of a tangible asset is your short-term rental property. In contrast, an example of an intangible asset is the business bank account you created to separate from your personal assets. 

Separating personal and rental use

If your property is used as a rental and for personal purposes, you track separate expenses, receipts, and other bills. This will promote efficiency and aid in a smooth tax preparation process.  

Tracking and claiming deductibles

Your short-term rental operational expenses are costs you incur when renters and guests stay at your property. You can deduct the vacation rental business-related portion of your expenses. Tax deductions to consider include: 

• Repairs

• Maintenance

• Supplies 

• Furniture 

Expense tracking

Track expenses by keeping receipts and logs each time a guest uses your short-term rental property. Tracking these expenses will support the eligible tax deductions related to your rental property.  A tax deduction is used to reduce your taxable income. You’ll then pay taxes on this lowered income amount.

Payroll for full-time and contract workers

Use your bookkeeping platform (such as Quickbooks, Xero, or Quickbooks Online), accounting software, or vacation rental accounting software to track payroll for full-time and contract workers, including income tracking, hourly wages, and other pertinent payments as part of your management system.

Tax Obligations for Vacation and Short-Term Rentals: The Variables

Self-employment taxes

Use the records you've tracked throughout the year and other supporting documentation to prepare and file your business tax return. Forms you may use to file your taxes and claim tax deductions include: 

IRS Form 1040

Individual taxpayers file IRS Form 1040, U.S. Individual Income Tax Return. Form 1040 calculates your federal taxable income and tax liability. 

You should also file schedules to report self-employment income: Form 1040 Schedules C and E.

Form 1040, Schedule C

To report business income and expenses, file IRS Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Schedule C calculates your business income or loss and is typically used when you provide substantial services (regular cleaning, laundry, etc.) for your short-term rental property. 

Form 1040, Schedule E

Report income or losses from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits by using Schedule E (Form 1040), Supplemental Income and Loss.

Form 1040, Schedule SE

You must also pay the 15.3% self-employment tax on your self-employed income. Sole proprietors must calculate self-employment tax liability using IRS Schedule SE (Form 1040), Self-Employment Tax. You can claim half of what you paid in self-employment taxes as a deduction.  

Quarterly Estimated Taxes

Self-employed individuals must also estimate and pay quarterly estimated taxes throughout the year. Quarterly estimated tax payment due dates for the 2025 tax year include: 

• April 15

• June 16

• September 15

• January 15, 2026

Form 1040, Schedule ES

Use IRS Form 1040-ES, Estimated Taxes for Individuals, to calculate and pay your quarterly estimated taxes. The form includes tax information such as payment vouchers and instructions for filing online.

Substantial services

While the typical landlord isn't expected to provide substantial services to tenants, it's more common among short-term rental property owners. Substantial services you may provide to short-term rental guests include: 

• Regular cleaning of the rental unit 

• Changing linens and sheets

• Ongoing maid service

Report these expenses and your rental income on Schedule C. 

Insubstantial services

Not everything you provide is considered a substantial service. Examples of services not considered to be "substantial" include: 

• Trash and recycling collection 

• The furnishing of lighting and heating

• Cleaning of public areas

Expenses tied to insubstantial services, such as paying for repairs in a public area, can be deducted as rental property expenses on Schedule E. 

Material participation

If you were involved in your short-term rental business's operations continuously, regularly, and substantially throughout the year, that activity is usually considered material participation. Generally, a business activity isn't considered passive if you've materially participated.

The IRS created a series of material participation tests (you must satisfy one or more) to determine if you materially participated. 

• You participated in the activity for more than 500 hours.

• Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity.

• You participated in the activity for more than 100 hours during the tax year and at least as much as any other individual, including those who didn’t have any interest in the activity, for the year.

• The activity is a significant participation activity, and you participated in all significant participation activities combined for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and didn’t materially participate under any material participation tests other than this. 

• Other than by meeting this test, you materially participated in the activity for any 5 of the 10 immediately preceding tax years, whether consecutive or not.

• The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves personal services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.

• Based on all the facts and circumstances, you participated in the activity regularly, continuously, and substantially during the year.

Note that you didn’t materially participate in the activity under the final test if you participated in the activity for 100 hours or less. Your participation in managing the activity doesn’t count in determining whether you materially participated under this test if:

• Any person other than you received compensation for managing the activity. 

• Or if any individual spent more hours managing the activity during the tax year than you did, regardless of compensation. 

Personal use of property

Short-term rental owners who stay in their property for at least 14 days (or 10% of the total rental days) must track the number of rental versus personal use days. It's a best practice to review your personal use days annually. Additional rules apply to homeowners renting a room or section of their primary residence.

Note that homeowners who use their vacation rental property and have fewer than 15 days of vacation rentals during the tax year should not report any rental income or expenses.

Get Expert Help: Done-For-You Vacation Rental Accounting with 1-800Accountant

While this guide will point short-term rental property owners in the right direction, it barely scratches the surface. Ensuring compliance and fully maximizing your rental property deductions while navigating confusing rules should be left to the experts, which is why short-term rental property owners and entrepreneurs trust accounting from the experts at 1-800Accountant, America's leading virtual accounting firm, as their accounting solution for their complex real estate tax work. 

Save time and achieve your annual real estate financial goals with our suite of affordable, tax-deductible financial services. Schedule a quick consultation–usually 30 minutes or less—to learn how bookkeeping, tax advisory, and business tax preparation and filing will help your real estate business maintain full IRS compliance with maximum tax savings.