Tax day was Tuesday. I've spent most of the last two weeks on the phone with hosts, their CPAs, and a few very stressed-out first-year operators trying to figure out why their refund evaporated or why they owe self-employment tax they weren't expecting.
I've been running short-term rentals in the South Bay for 12 years. Same tax mistakes surface every spring. The 2025 filing season has its own wrinkles, though — 1099-K thresholds dropped again, the IRS is paying closer attention to the STR loophole, and a lot of new hosts who started during the 2024 tech-hiring bump are filing their first Schedule E ever.
One disclaimer up front: I'm not a CPA or tax attorney. I've watched a lot of hosts file returns and I've read the IRS publications more times than any person probably should, but take everything below to your own tax professional before acting on it. The goal here is a smarter conversation with your accountant, not a replacement for one.
Here are the ten mistakes I'm seeing most on 2025 returns.
1. Filing Schedule E when the return actually belongs on Schedule C
This is the biggest one, and it trips up hosts in both directions.
Schedule E is for passive rental income. Schedule C is for active business income — which triggers self-employment tax at 15.3% on top of your regular income tax. The dividing line is "substantial services." If all you offer is a clean unit between stays, a stocked fridge with basics, WiFi, and linens, you're Schedule E. Standard short-term rental territory.
If you're offering daily housekeeping, meals, transport to the airport, a concierge who books dinner reservations, or anything that starts to look like a hotel, the IRS wants you on Schedule C. I know a host in Los Gatos who runs what's essentially a boutique B&B with breakfast service and filed Schedule E for three years. His CPA caught it this year. He's amending.
The opposite mistake is almost as expensive. Hosts who file Schedule C when their operation is just a cleaned-between-stays STR pay 15.3% SE tax they didn't owe. On $80,000 of net rental income, that's over $12,000 left on the floor.
2. Personal-use days that triggered the residence rule
If you or a family member used the property for more than 14 days, or more than 10% of the total rental days, the IRS classifies it as "a dwelling unit used as a residence." Your loss deductions get capped at rental income for the year. No paper losses to offset other income.
The hosts getting burned here are the ones who took their own property for a long family stretch — two weeks at Christmas, a week in the summer, a couple of weekends — without tracking the days. Add it up and they're over 14. One host I talked to lost about $18,000 in deductible losses because of a family reunion week he didn't log.
Track personal days on a calendar. Every single one.
3. Treating occupancy tax as rental income
Transient occupancy tax collected from guests is not your income. It passes through. It goes on your city or county TOT return (San Jose 10%, Palo Alto 14%, Mountain View 10%, etc.) — not on Schedule E.
Some hosts include the TOT passthrough in gross rental receipts and then try to deduct it as an expense. Others forget it's not income at all and just pay tax on it. Both are wrong and both are common. If Airbnb is collecting and remitting TOT on your behalf in your jurisdiction, it shouldn't show up on your return as either income or expense. It's not yours.
4. Missing the 1099-K threshold change
This one keeps surprising hosts. The federal 1099-K reporting threshold for 2025 tax year (what you filed this month) was $2,500. For the 2024 tax year it was $5,000. It drops to $600 for the 2026 tax year.
A lot of hosts who've never received a 1099-K before got one this year. Airbnb and VRBO now send them to anyone who clears $2,500 in gross bookings. If you didn't report that income because "no form came last year," the IRS already has the form. They'll match it.
And if you're operating on a calendar year, start planning for $600 next year. Essentially every host will get a 1099-K.
5. Skipping depreciation entirely
This one still shocks me every time. First-year hosts will skip depreciation because they don't want to deal with it, or because the CPA didn't push on it, or because they think opting out "keeps it simple."
The IRS treats you as if you took depreciation whether you did or not. When you sell, you get hit with depreciation recapture at 25% on the amount you should have taken. So skipping it costs you the current deduction and the future recapture. You pay twice for nothing.
Residential rentals on Schedule E depreciate over 27.5 years straight-line. Schedule C properties are 39 years. Take it.
6. Cost segregation on the larger properties
For STRs with a building basis over roughly $500-750k (and most Bay Area single-family homes clear that easily), a cost segregation study reclassifies 20-30% of the building into 5-year and 15-year property — carpet, cabinetry, landscaping, specialty lighting, appliances.
That accelerates depreciation significantly. I've seen first-year deductions of $80,000 to $150,000 on a $1.2M STR property after a cost seg study. The study itself runs $3,500-$7,000. Pencil it out. For bigger properties it's an easy call.
Worth talking to your CPA about before next year even if you missed it this year.
7. Cleaning fees, both sides
Cleaning fees charged to guests are income. The actual cleaning expense you pay your cleaner is a deduction. Both belong on the return. I see hosts skip one or the other. A few ambitious souls skip both and zero it out, which isn't correct either.
Same logic applies to linen fees, hot tub fees, pet fees. If you collected it, it's income. If you spent it, it's a deduction.
8. Mileage, home office, and the Schedule E trap
Miles driven to the property for maintenance, cleaning inspections, restocking, or guest turnover are deductible. Keep a mileage log. The 2025 standard rate is 70 cents per mile.
Home office is where it gets messy. On Schedule E, you generally can't claim a home office because renting isn't considered an active trade or business. Hosts on Schedule C with a legitimate home office setup can claim it. Hosts on Schedule E who try to deduct a home office often see it disallowed on audit.
9. The short-term rental loophole (this is the big one for tech hosts)
If your average guest stay is under 7 days AND you materially participate in the rental — 500 hours, or 100 hours and more than anyone else, or a few other tests — the activity isn't considered passive under IRS rules. Losses can offset your W-2 income.
For a software engineer making $400k at Google with a South Bay STR showing a $50,000 paper loss from depreciation, that's worth something like $18,000-$22,000 in federal tax savings. This is the single biggest reason high-income tech employees buy Bay Area STRs.
The catch is material participation. You need contemporaneous records proving hours. A calendar log, not a reconstruction. If you use a cohost or property manager, you need to make sure you personally cross the hours threshold yourself. This is where a cohost partnership is structured differently from traditional property management — the owner stays involved enough to qualify.
If your CPA hasn't brought this up with you, bring it up with them.
10. Nonresident California withholding
If you're an out-of-state owner with a California STR, your property manager is required to withhold 7% of gross rents on payments over $1,500 per month, unless you've filed a Form 590 certifying residency or a Form 588 waiver.
A lot of managers just don't do this. And a lot of out-of-state owners don't know about it until the FTB comes knocking. The withholding is an advance against the owner's California tax liability — you get it back on your 540NR — but the manager who didn't withhold is on the hook for the 7% plus penalties.
If you own California property and live elsewhere, verify your manager's withholding process this week.
A common thread on almost all of these: STR tax is its own discipline. A general-practice CPA who files a couple of Schedule Es a year will miss things. If the person doing your return can't explain the short-term rental loophole from memory, find someone else. Most of my hosts use CPAs who specialize in real estate professionals or STR operators, and the fee difference ends up being trivial against what the right call on classification or depreciation can save.
If you want a rental analysis that includes what the after-tax numbers actually look like for your South Bay property, happy to walk through it.
Questions about your South Bay STR after filing season? Request a free rental analysis or call me at (408) 813-8001.
Sources
- Publication 527, Residential Rental Property — Internal Revenue Service
- Topic No. 415, Renting Residential and Vacation Property — Internal Revenue Service
- About Schedule E (Form 1040), Supplemental Income and Loss — Internal Revenue Service
- Understanding Your Form 1099-K — Internal Revenue Service
- Nonresident Withholding Requirements — California Franchise Tax Board
- Tax issues when renting your home on Airbnb or VRBO — Journal of Accountancy
- Where does your money go? Understanding the 1099-K from Airbnb — Airbnb Help Center
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