Most people who are interested in buying a short term rental start with the obvious math. What will it rent for, how many weeks will it book, and what does that mean for the bottom line at the end of the year?
What many buyers don’t fully consider until after they’ve already purchased is the tax benefit. Owning a short term rental comes with a set of tax advantages that most traditional investments simply don’t offer. Understanding them before you buy is one of the smartest things you can do.
How the IRS Classifies Short Term Rentals
Before getting into the specifics, it helps to understand how short term rentals are treated for tax purposes because they’re handled differently than long term rentals and that distinction matters.
A property is generally classified as a short term rental when the average guest stay is seven days or fewer. This classification opens the door to a different set of deductions and tax treatment than a property rented on a long term basis, and in many cases the advantages are significantly more favorable.
The rules around STRs can be nuanced and they vary depending on how much time you personally spend at the property, how it’s used, and how actively involved you are in managing it. Working with a tax professional who has experience with short term rentals specifically is genuinely worth the investment. A good CPA who understands this space will more than pay for themselves in what they help you find and protect.
Depreciation: The Biggest Benefit Most Owners Overlook
If there’s one tax benefit that surprises new short term rental owners most, it’s depreciation.
When you purchase a rental property, the IRS allows you to deduct the cost of the building itself over time, even while the property is appreciating in value. For residential rental properties the standard depreciation schedule runs over 27.5 years. This means every year you own the property you can deduct a portion of the purchase price from your taxable income, completely separate from any expenses the property incurs.
On a Maine lakefront property or a coastal home near Old Orchard Beach, that annual depreciation deduction can be significant. Because it’s a non-cash deduction, meaning you’re not actually spending money to claim it, it has a way of reducing your taxable income in a way that feels almost too good to be true.
Bonus Depreciation and Cost Segregation
Standard depreciation is valuable. Bonus depreciation and cost segregation take it further.
Cost segregation is a tax strategy that involves breaking a property down into its individual components, things like appliances, flooring, fixtures, landscaping, and outdoor features, and depreciating those components on an accelerated schedule rather than over 27.5 years. Some components can be depreciated over five or fifteen years instead, which means significantly larger deductions in the early years of ownership.
For a well furnished short term rental on Sebago Lake or along the Southern Maine coast, a cost segregation study can result in substantial first year deductions that dramatically reduce taxable income right out of the gate.
Bonus depreciation rules have shifted in recent years so it’s worth talking through the current landscape with a qualified tax professional, but the strategy remains one of the most powerful available to short term rental owners who know to ask about it.
Deductible Operating Expenses
Beyond depreciation, short term rental owners in Maine and across New England can deduct a wide range of operating expenses directly related to the property.
Property management fees, repairs and maintenance, supplies, utilities, insurance, marketing costs, platform fees, and professional services like accounting and legal all qualify as deductible expenses when they’re directly tied to the rental activity.
Here’s something worth highlighting specifically. Every dollar you pay Days Away for property management is a fully deductible business expense. In other words, the cost of having a professional local team handle everything for you is not just an investment in a better guest experience and a better run property. It’s also a write off. For a lot of our owners, that changes how they think about the cost of full service management entirely.
For any property owner, these expenses add up over the course of a season. Deducting them in full reduces the taxable income generated by the property and in many cases results in a much lower effective tax rate on rental income than owners expect going in.
Keeping clean, well organized records throughout the year makes this part of the process significantly easier come tax time. Days Away tracks and documents all management related expenses on behalf of our owners throughout the year, so when tax season arrives everything is organized and ready to go.
Mortgage Interest and Property Tax Deductions
For most short term rental owners, mortgage interest and property taxes represent two of the largest annual expenses associated with the property.
Both are generally deductible against rental income when the property is used primarily as a rental rather than a personal residence. On a Maine vacation property with a substantial mortgage balance, the interest deduction alone can be substantial, particularly in the early years of the loan when interest makes up the largest portion of each payment.
Property taxes in Maine vary by municipality but are deductible in full against rental income for properties that qualify. For owners in towns like Naples, Scarborough, Old Orchard Beach, and the surrounding communities, this is an annual deduction worth understanding clearly.
What Personal Use Does to Your Deductions
This is an area that catches many short term rental owners off guard, particularly those who bought a property in Maine or New England with the intention of enjoying it themselves part of the year.
The IRS uses what’s commonly referred to as the 14 day rule to determine how personal use of the property affects your deductions. If you use the property for personal purposes for more than 14 days or more than 10 percent of the total days it’s rented at fair market value, whichever is greater, the property is treated as a personal residence for tax purposes and the deductions available to you change significantly.
This doesn’t mean personal use eliminates the tax benefits of owning an STR. It does mean that how you structure and document personal use matters and is worth thinking through carefully before you buy, not after.
Working With a Tax Professional Who Understands Short Term Rentals
Short term rentals are not treated the same way as long term rentals for tax purposes and they’re not treated the same way as primary residences either. The rules are specific, there is ample opportunity, and the mistakes are costly. A general CPA who handles personal tax returns but doesn’t have deep experience with short term rental properties may not be aware of strategies like cost segregation, material participation, or the nuances of how the 14 day rule interacts with your specific situation.
Finding a tax professional who works regularly with real estate investors and short term rental owners in Maine or New England is worth the effort. The right CPA can help you build a strategy that makes the most of everything available to you as an owner.
Buying a short term rental in Maine or anywhere in New England is a decision most owners make because of the income potential and the lifestyle appeal. The tax benefits are often what make it a genuinely compelling investment even beyond the cash flow.
Depreciation, deductible operating expenses, mortgage interest, property taxes, cost segregation, and the potential to use rental losses to offset other income. Understood and applied correctly, these advantages can meaningfully change the financial picture of owning a vacation rental property.
At Days Away, we work with short term rental owners across Southern Maine, from Old Orchard Beach and Scarborough to the Sebago Lakes Region and the Naples area. While we’re not tax advisors and this blog is for informational purposes only, we’re always happy to talk through what owning and managing a short term rental in this market actually looks like in practice.
If you’re thinking about purchasing a property in Southern Maine and want to understand what it could earn, we’d love to have that conversation. Click here to book a one-on-one call with one of our Co-Founders, Matt.
This blog is intended for informational purposes only and does not constitute tax or legal advice. Please consult a qualified tax professional for guidance specific to your situation.
