I work with NJ Airbnb and VRBO hosts, and the question I hear most is simple: what can I actually write off? The answer depends on how many days you rent, how much you personally use the property, and what kind of services you offer guests. If you're looking for a general overview of NJ short-term rental taxes, I've written a separate guide covering the full tax landscape. This post is focused specifically on deductions and write-offs.

The 14-Day Rule: When You Owe Nothing

Under IRC Section 280A, if you rent your property for 14 days or fewer during the year, the rental income is completely tax-free. You don't report it. You don't owe federal or NJ income tax on it. This is one of the few true income exclusions in the tax code.

The catch: you also can't deduct any rental expenses for those days. No depreciation, no cleaning fees, nothing allocated to rental use. It's all or nothing.

If you rent for more than 14 days, everything changes. All rental income becomes taxable, and you need to start tracking deductions carefully.

Schedule E vs. Schedule C: Which Form Do You Use?

This distinction controls whether you owe self-employment tax on your rental income.

Schedule E is where most Airbnb hosts report. You're providing space and basic amenities. Net income on Schedule E is not subject to the 15.3% self-employment tax. Losses are subject to passive activity rules.

Schedule C applies if you provide substantial services to guests, things like daily housekeeping, breakfast, concierge services, or organized activities. Think hotel-level service. Schedule C income is subject to self-employment tax, but you can also claim business losses without passive activity limitations.

Standard cleaning between guests does not trigger Schedule C. Changing the linens and restocking soap after each checkout is a normal landlord activity, not a substantial service.

Passive vs. Active Participation

If you file on Schedule E, the passive activity rules under IRC Section 469 determine whether you can use rental losses to offset your W-2 or other non-passive income.

There are two levels to understand:

  • Active participation: A lower threshold. You make management decisions (approve tenants, set prices, authorize repairs). If your AGI is under $100K, you can deduct up to $25,000 in rental losses against non-passive income. This phases out between $100K and $150K AGI.
  • Material participation: A higher threshold with seven tests. The most common is spending more than 500 hours per year on the rental activity. If the average rental period is 7 days or fewer (most Airbnb properties qualify), and you materially participate, the activity is not treated as passive at all. This means losses are fully deductible against any income.

That 7-day average rental period exception is a significant planning opportunity for high-turnover Airbnb hosts. If you're actively managing bookings, coordinating cleaners, handling guest communication, and spending 500+ hours per year doing it, your losses may be fully deductible.

Deductions You Can Claim

Here's what NJ Airbnb hosts commonly deduct. For mixed-use properties (where you also use the property personally), each expense must be allocated between rental days and personal days.

Property Costs (Allocated by Rental Percentage)

  • Mortgage interest: The rental-use portion goes on Schedule E. The personal portion goes on Schedule A (subject to the $750K debt limit).
  • Property taxes: Same allocation. The personal portion is subject to the $10,000 SALT cap.
  • Homeowners insurance: Allocated by use. If you carry a separate landlord or short-term rental policy, 100% deductible against rental income.
  • Utilities: Electric, gas, water, internet, cable. Allocated by rental-use percentage.

Direct Rental Expenses (100% Deductible)

  • Cleaning between guests: Fully deductible. This is your largest variable cost and it's a direct rental expense.
  • Platform fees: Airbnb's host service fee (typically 3%) is deductible. VRBO fees work the same way.
  • Guest supplies: Linens, towels, toiletries, coffee, welcome baskets.
  • Professional photography: Listing photos are a marketing expense.
  • Repairs and maintenance: Fixing a broken appliance, patching a wall, replacing a faucet. These must be repairs (restoring to working condition), not improvements (adding something new or upgrading).
  • Landscaping and snow removal: If required for guest access and safety.
  • CPA and tax prep fees: The portion related to your rental activity.

Depreciation

This is where the real tax savings are for rental property owners.

  • The building (not land) is depreciated over 27.5 years using straight-line depreciation. If your property has a depreciable basis of $300,000, that's $10,909 per year in depreciation deductions.
  • Furnishings and equipment (beds, sofas, TVs, kitchen appliances, electronics) are depreciated over 5 years as personal property. A $20,000 furniture package generates $4,000 per year in deductions over 5 years, or you can expense it all in year one under Section 179 or bonus depreciation.
  • Improvements like a new roof, HVAC system, or kitchen renovation are capitalized and depreciated. They don't get expensed immediately.

If you converted a personal residence to rental use, your depreciable basis is the lower of fair market value or adjusted basis at the time of conversion. Get an appraisal when you convert.

For properties worth $300K or more, a cost segregation study can reclassify components into shorter depreciation lives and accelerate your deductions significantly.

NJ Occupancy Tax Obligations

NJ imposes two taxes on short-term rental charges that are separate from income tax:

  • NJ Sales Tax: 6.625% on rental charges
  • NJ Occupancy Fee: 5% on room charges

Airbnb and VRBO collect and remit both of these on behalf of most NJ hosts. Check your platform's earnings summary to confirm. If you're renting through direct bookings (your own website, repeat guests paying you directly), you're responsible for registering with NJ, collecting the tax, and filing returns yourself.

These taxes are not deductions on your income tax return because they're collected from guests and passed through to the state. But if you're absorbing them in your pricing rather than adding them on top, the economic cost reduces your net rental income.

The 1099-K from Airbnb

Starting in 2024, Airbnb and VRBO issue Form 1099-K if your gross rental receipts exceed $5,000 (down from the old $20,000 threshold). This form reports gross receipts before platform fees.

Do not just report the 1099-K number as your taxable income. Your taxable rental income is gross receipts minus all deductible expenses. The 1099-K is a starting point, not the bottom line.

If your rental falls under the 14-day exclusion, you may still receive a 1099-K. You are not required to report excluded income, but keep records documenting your rental days in case the IRS questions the discrepancy.

What You Can't Deduct

  • Personal-use expenses: The personal portion of all shared costs is not deductible against rental income.
  • Capital improvements: Must be depreciated, not expensed in year one (unless Section 179 or bonus depreciation applies to the specific asset).
  • Commuting to the property: Travel between your home and a local rental property is generally commuting, not a deductible business expense.
  • Vacation home losses beyond income: If your property is a mixed-use vacation home (personal use exceeds the greater of 14 days or 10% of rental days), you can't deduct rental losses beyond rental income. Excess losses are suspended.

NJ Capital Gains When You Sell

One NJ-specific item that catches hosts off guard: NJ taxes capital gains as ordinary income. There is no preferential capital gains rate at the state level. If you sell a rental property and realize a $100,000 gain, NJ taxes that at your regular income tax rate (up to 10.75%), while the federal rate might be 15% or 20% for long-term capital gains.

Also remember that all the depreciation you claimed (or could have claimed) gets recaptured at sale. Federal depreciation recapture is taxed at up to 25%. This is the tradeoff for the annual depreciation deductions.

Keep Good Records

I can't stress this enough. Track your rental days, personal-use days, every expense, every receipt. Use bookkeeping software or a dedicated system to separate rental activity from personal finances. If the IRS questions your deductions, contemporaneous records are your best defense.

If you're running a short-term rental in NJ and want help sorting out your deductions, I'm a NJ-licensed CPA who works with Airbnb and VRBO hosts. Reach out for a free consultation.