STR vs LTR: tax comparison for rentals

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Long-term rentals are passive by default, avoid self-employment tax and depreciate over 27.5 years. Short-term rentals with 7-day average stays can produce non-passive losses if you materially participate, but they bring occupancy taxes, more work and, with substantial services, possible self-employment tax.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

CPA Warning Label: The STR loss benefit costs hours you must prove, and Schedule C treatment can add 15.3% self-employment tax on profits. Choose the deal, not the deduction.

Income taxation

Both types report rent as ordinary income. Where it gets reported, and what else it triggers, differs.

Pub. 527 says rental income goes on Schedule C if you provide substantial services primarily for the occupant's convenience, such as regular cleaning, changing linen or maid service. Cleaning between guests alone is generally not the same as daily maid service, but the line is fact-specific. See Schedule C vs Schedule E for STRs.

Loss usage

This is the headline difference.

LTR: losses are passive. You can offset up to $25,000 of non-passive income if you actively participate, but that allowance phases out between $100,000 and $150,000 of modified AGI (section 469(i)), and those figures are not indexed. Above $150,000 MAGI, losses are suspended unless you qualify as a real estate professional, which requires 750+ hours and more than half your working time in real property trades.

STR: if the average stay test is met, the activity escapes the "rental" label. Material participation (for example, more than 100 hours and more than anyone else) makes losses non-passive. That is the "STR loophole": a W-2 earner can use STR losses without real estate professional status.

Nuance: if you have a profitable STR you don't materially participate in, its income is passive, which can absorb suspended passive losses from your LTRs. Sometimes losing the loophole is a feature.

One more wrinkle: an STR loss you can use against wages this year is a deduction at your top marginal rate, while a suspended LTR loss waits, sometimes for a decade, and is then released at sale against gain that might be taxed at lower capital gains rates. Time value and rate arbitrage both favor the usable loss, if it is real and documented.

SE tax risk

LTR rent is excluded from self-employment income under section 1402(a)(1). STR income on Schedule C is subject to self-employment tax: 15.3% up to the 2026 Social Security wage base of $184,500 (SSA), and 2.9% Medicare above it, plus the 0.9% additional Medicare tax over $200,000 single or $250,000 joint.

On a $40,000 Schedule C STR profit, SE tax is roughly $40,000 × 92.35% × 15.3% = about $5,650, of which half is deductible above the line. If your STR is profitable, the services question is worth real money. If it runs at a loss, the issue mostly disappears that year.

Local taxes and permits

STRs live in a different regulatory universe. Many states, counties and cities impose transient occupancy, lodging or hotel taxes on stays under a set number of days (commonly 30). Some platforms collect and remit them for you in some jurisdictions, and not in others. Many cities also require STR permits, registration numbers on listings, or limit STRs to primary residences.

LTRs usually face only property tax, a business license in some cities and rental registration or inspection programs. Check your city and county websites before buying. Our STR occupancy taxes guide walks through the usual structures; rental sales tax and local permits covers the LTR side.

After-tax return example

Illustration (made-up numbers): Frugal Fran has $200,000 of W-2 income and a $500,000 property ($100,000 land). Compare two ways to run it in its first full year, ignoring state tax.

Working the LTR column: $36,000 − $16,000 − $14,545 − $5,000 = $455 of taxable income. The STR: $60,000 − $30,000 − $10,256 − $25,000 = a $5,256 loss, which offsets wages because Fran materially participates. Add a cost segregation study and the STR loss gets much bigger (see STR + cost seg).

The catch is in the hours column: the LTR took Fran maybe 30 hours; the STR took 250. At her $100/hour wage, that is a lot of unpaid labor buying a deduction. And the STR's revenue is far more volatile: a bad season, a new local ordinance or a new resort down the road changes the math. Compare cash-on-cash in the after-tax cash-on-cash guide.

Depreciation and furnishing differences

An LTR is often rented unfurnished, so most of the depreciable basis is the building on a 27.5-year schedule, plus appliances on a 5-year schedule. An STR is a furnished product: beds, sofas, kitchenware, linens, smart locks, outdoor furniture and the inevitable decorative canoe paddle. Those are 5-year assets eligible for 100% bonus depreciation if acquired after January 19, 2025, and many small items can be expensed under the $2,500 de minimis safe harbor.

Replacement cycles differ too. An LTR tenant might keep the same refrigerator for a decade. STR guests treat furnishings like rental cars, so you will replace things more often, and each replacement is either a deduction or a new depreciable asset. More detail in depreciating furniture and appliances.

The longer 39-year building life for transient-use STRs is a real downside for owners who don't do a cost segregation study. On a $400,000 building, the annual straight-line deduction drops from about $14,545 to about $10,256.

Exit taxes compared

When you sell, the gain math is the same skeleton for both: amount realized minus adjusted basis, with depreciation recapture first. Differences come from what you depreciated and how fast.

• LTR: mostly unrecaptured section 1250 gain at up to 25%, then long-term capital gain. Suspended passive losses are released on a fully taxable sale to an unrelated party.
• STR with bonus-heavy furnishings or a cost seg: more section 1245 recapture at ordinary rates, since you took more depreciation on short-life property.
• Both: the 3.8% net investment income tax may apply above $200,000 single or $250,000 joint MAGI, unless the activity is a non-passive trade or business for you, which is one more place the STR material participation result matters.

Both can use a 1031 exchange if held for investment or business use. If you used an STR personally, watch the personal-use limits in 1031 for vacation homes.

Personal use rules apply to both

If you or your family use either property for personal purposes more than the greater of 14 days or 10% of fair-rental days, section 280A treats it as a residence and limits deductions to rental income, with expenses allocated between personal and rental days. STR owners trip this more often because the beach house is, well, at the beach. See vacation home rental rules.

Which one fits

LTR fits people who want low hours, steady cash and simple returns, and who accept passive-loss treatment. STR fits people who want to operate a small hospitality business and can prove participation. Choose the property first. Run both versions of the budget, including cleaning fees, platform fees, supplies, furnishing replacement, higher insurance and vacancy, and only then layer taxes on top. A tax benefit can't rescue a bad deal, and the tax code can change its mind faster than a 30-year mortgage.