The short-term rental tax guide for NWA owners

Short-term rentals get some of the most favorable treatment in the tax code, and some of the most misunderstood. The difference between a rental that saves you thousands and one that triggers an audit adjustment usually comes down to a few facts: how long guests stay, how many hours you put in, and what you can prove. Here's how it works in 2026.

1. Why short-term rentals are taxed differently

By default, rental income is "passive." Passive losses can only offset passive income, so depreciation and other losses from a typical long-term rental usually can't reduce tax on your salary or business income (with limited exceptions).

The passive activity rules carve out an exception. If the average guest stay is 7 days or less, the property isn't treated as a "rental activity" for these rules at all. It's treated like a business. That's what people mean by the "STR loophole."

2. The two tests that unlock it

Test one: average stay of 7 days or less

Divide total rented nights by the number of separate stays for the year. Many NWA short-term rentals average well under 7 nights. Long medical or corporate stays can push the average up, so track it.

Test two: you materially participate

Clearing the 7-day test alone isn't enough. You also have to materially participate, meaning you're involved in operations on a regular, continuous and substantial basis. The regulations give seven ways to qualify. The three owners use most:

1. 500 hours or more in the activity during the year.
2. Your participation is substantially all of the participation by anyone, including cleaners and managers.
3. More than 100 hours, and not less than any other individual, including your cleaner or your property manager.

Meet both tests and losses from the property, including large first-year depreciation, can offset W-2 wages and business income. Miss either and the losses are generally passive.

3. Bonus depreciation is back at 100%

The One Big Beautiful Bill Act, signed July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. The IRS issued interim guidance in Notice 2026-11.

Buildings themselves aren't eligible, since residential rental structures are depreciated over decades. But much of a furnished rental is: furniture, appliances, electronics, and certain land improvements like patios, driveways and landscaping. Combined with the STR rules above, that can create a large first-year deduction.

• Acquisition date matters. Property under a binding contract on or before January 19, 2025 follows the older phase-down rates.
• You can elect out or choose a lower rate in some cases. A huge deduction isn't always the best move if your income is low this year or you plan to sell soon.
• State returns can differ. Arkansas has historically not followed federal bonus depreciation, so your state depreciation may not match your federal return.

4. Cost segregation

A cost segregation study breaks the purchase price into components with shorter lives (5, 7 and 15 years) instead of treating the whole home as a 27.5-year asset. With 100% bonus depreciation, those shorter-life components can often be deducted in year one. For a typical furnished NWA home, studies can shift a meaningful share of the purchase price into those categories. Whether a study pays for itself depends on the price, your tax bracket, and whether you meet the tests in section 2.

5. The 14-day rules

• Rent it 14 days or fewer a year and the rental income is generally tax-free, and you don't deduct rental expenses. This is useful for owners who live in NWA and rent around big weekends.
• Use it personally more than 14 days, or more than 10% of the days it's rented at a fair price, whichever is greater, and the home is treated partly as a residence. Deductions get limited and allocated. Owner stays count, and so do stays by family members at below-market rates.

6. Schedule C or Schedule E? Self-employment tax

Most short-term rental income goes on Schedule E and isn't subject to self-employment tax. If you provide substantial hotel-like services, such as daily cleaning during stays, meals or concierge services, the activity can move to Schedule C and become subject to self-employment tax. Normal turnover cleaning between guests generally doesn't count as substantial services.

7. What you can deduct

• Mortgage interest, property taxes and insurance
• Management fees, cleaning and laundry, supplies and restocking
• Platform fees and software (pricing tools, smart locks, Hospitable)
• Utilities, internet, streaming and lawn care
• Repairs and maintenance (improvements are depreciated instead)
• Depreciation on the home, furniture and equipment
• Travel to the property when the trip is primarily for the rental

8. Records that hold up

The STR rules are a frequent audit target, and most lost cases come down to records. Keep:

• A contemporaneous hour log: date, task and time, kept as you go, not rebuilt at tax time.
• Stay data from your platforms to prove your average stay.
• Personal-use days, including family stays.
• Your 1099-K forms and payout reports, reconciled to bank deposits and to taxes the platforms collected for you.

Sources

• Internal Revenue Code §469 and Treas. Reg. §1.469-1T(e)(3) (average period of customer use) and §1.469-5T(a) (material participation tests)
• Internal Revenue Code §280A (personal use and the 14-day rules)
• Internal Revenue Code §168(k) as amended by the One Big Beautiful Bill Act (Pub. L. 119-21), and IRS Notice 2026-11

Related: NWA short-term rental rules and lodging taxes

This article is general information, not tax or legal advice, and reading it doesn't create a client relationship. Results depend on your specific facts and on law that can change. NWA Stay Hub and Prime & Ledger CPAs are affiliated companies under common ownership; we may refer clients between them. Last reviewed October 12, 2026.