The spare room pays the car payment.
The basement pays for the ski pass.
The old house pays for the new one.
Each of those is a different tax return.
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A house that earns money is a business, and the tax code has three sets of rules for it depending on how much of the house, how often, and whether you still live there. Rent the whole place for a few weekends a year and the income may not be taxable at all. Rent a room all year and you have a small Schedule E with depreciation on a fraction of the house. Move out and rent the whole thing, and you have a rental property with a basis question, a depreciation schedule, and a home-sale exclusion that has started a clock.
Short-term rentals add a fourth set: Airbnb-style rentals averaging a week or less are treated differently from a lease, sometimes better, sometimes worse, and they bring Colorado sales and lodging tax with them. Below are the rules in the order people encounter them.
If you rent your home, or a room in it, for 14 days or fewer in the year, and you use it as a home yourself, the rent is not income. You don’t report it, and you can’t deduct anything against it. It is the one place in the code where money arrives and nothing happens. A family that rents its Castle Rock house for two weeks during a tournament, or its Denver condo for a convention, keeps every dollar.
Day fifteen changes everything: all of the rent for the year becomes reportable, not just the extra day. If a platform sends you a 1099-K anyway (the 2026 threshold is $20,000 and 200 transactions, so most 14-day renters won’t get one), the income is reported and then backed out with an explanation.
↑ Back to topRent a bedroom to a tenant for the year and you have rental income on Schedule E, with expenses allocated to the rented part. The usual method is square footage: a 200-square-foot room in a 2,000-square-foot house is 10%. Ten percent of the mortgage interest, property taxes, insurance, utilities and repairs is a rental expense; the rest of the interest and taxes stays on Schedule A if you itemize. Anything spent only on the room (a lock, a mini-fridge, repainting it) is 100% rental.
You also depreciate 10% of the house (not the land) over 27.5 years. That depreciation is not optional; the IRS will treat it as taken whether you claimed it or not, and it comes back at up to 25% when you sell. The home-sale exclusion still covers the whole house, including the room, as long as it is within the same dwelling unit; only the depreciation since May 1997 is taxed on sale. A separate structure, like a detached casita, is not part of the dwelling unit and its gain is not excluded.
Losses on a rented room are limited to the rental income when you also live in the home; you can’t generate a loss against your wages from a bedroom.
↑ Back to topAn Airbnb or VRBO listing is still rental real estate on Schedule E, with one large exception and one trap.
The exception. Rental losses are normally passive, which means they can only offset passive income, with a $25,000 allowance that phases out between $100,000 and $150,000 of income. But if the average stay is seven days or less, the IRS doesn’t consider it a “rental activity” for the passive rules at all. If you also materially participate, which for most owners means doing substantially all the work yourself or more than 100 hours and more than anyone else, the loss is not passive and offsets your wages. In the first year, with furniture, setup costs and depreciation, that loss can be real. This is the short-term rental “loophole” you’ve seen advertised; it is legitimate, it requires a log of your hours, and it stops working the day you hire a property manager who does more than you do.
The trap. If you provide substantial services to guests, the kind a hotel provides (daily cleaning during the stay, meals, concierge, transportation), the activity moves to Schedule C and the net income is subject to self-employment tax at 15.3%. Cleaning between guests, linens, wi-fi and a welcome basket are not substantial services. Breakfast is.
Either way, the platform reports your gross receipts on a 1099-K when you cross $20,000 and 200 transactions, and the cleaning fees and platform fees the guest paid are in that gross number. The fees are then deducted.
↑ Back to topIf you personally use the property for more than the greater of 14 days or 10% of the rental days, it is a residence for the year, and expenses are allocated between rental and personal days. Rental expenses are allowed only up to the rental income; a loss is not allowed and carries forward. Interest and taxes for the personal days go to Schedule A. The order of deductions matters: interest and taxes first, then operating costs, then depreciation, so the depreciation is often what gets suspended.
Personal use includes use by family members at any price, use by anyone at less than fair rent, and days you spend at the property doing anything other than full-time repairs. Days spent fixing the furnace don’t count against you; a week at your own mountain condo does. A log of who stayed when is the record that decides this, and the platform calendar is a good start.
↑ Back to topYou move to the new house and keep the old one as a rental. Three things to settle on day one.
Basis for depreciation is the lower of what the house cost you (plus improvements) or its value on the day you convert it, with the land taken out. A Highlands Ranch house bought for $350,000 in 2012 and worth $700,000 today depreciates from $350,000 less land, over 27.5 years: roughly $10,000 a year. A house that has fallen in value depreciates from the lower value. Get an appraisal or a broker’s opinion at conversion and keep it.
The home-sale exclusion starts a clock. You can exclude $250,000 ($500,000 joint) of gain if you lived in the house two of the five years before the sale. Once you move out, that means a sale within three years keeps the full exclusion; after that it is gone. The years it was rented after you moved out do not reduce the exclusion, but the depreciation you took is always taxed, at up to 25%, exclusion or not. The combination, a sale in year three with the exclusion and a small recapture bill, is often the best outcome, and our page on combining the exclusion with a 1031 exchange covers the alternative.
The passive rules apply from the first day. A conventional lease is a passive activity, the $25,000 allowance applies if your income is under $100,000 and you actively manage it, and above $150,000 losses are suspended until there is passive income or a sale.
↑ Back to topRenting the condo to your daughter for $800 when the market is $1,900 makes every day she lives there a personal use day for you. The rent is still income, but the expenses are limited to the income: no loss, no depreciation beyond what the rent absorbs, and the interest and taxes go to Schedule A as a second home. Rent to her at a fair price (a modest discount for a reliable tenant, around 10%, is defensible) and it is an ordinary rental. Document the market rent with listings from the time you set hers.
↑ Back to topThe basement is 900 of the house’s 3,000 square feet with its own entrance. Rented 120 nights in 2026, average stay 3 nights, $19,800 of gross receipts. They clean between guests themselves, 180 hours for the year; no meals, no daily service. They used it themselves for zero nights. House basis $420,000 (land $100,000).
Which schedule: E. No substantial services, so no self-employment tax.
Allocation: 30% of the house. The basement is available for rent all year, so the 30% share of interest ($5,400), taxes ($1,650), insurance ($600), utilities ($1,200) and depreciation ($320,000 × 30% ÷ 27.5 = $3,490) is deductible, plus 100% of furniture, supplies, platform fees and a $2,100 bathroom repair. Total expenses about $17,500. Net income about $2,300, taxed at their bracket.
Had it shown a loss: with a 3-night average stay and 180 hours of their own work, the loss would have been nonpassive and would have reduced their wages. In year one, with $6,000 of furniture, it would have.
Colorado: Lone Tree requires a short-term rental license; state sales tax of 2.9% plus the Lone Tree and RTD/cultural rates and lodging tax apply to stays under 30 days, and the platform collects and remits most of it. The 4.40% income tax applies to the $2,300.
Three Colorado layers sit on top of the federal rules. Sales and lodging tax: stays of fewer than 30 days are taxable lodging in Colorado; the state rate is 2.9% plus county, city, special district and local lodging taxes, which run 10% to 15% combined in the metro area. Airbnb and VRBO collect and remit the state and most local taxes for you, but you are responsible for any local tax the platform doesn’t handle and for a state sales tax license if you take direct bookings. Licensing: most metro cities require a short-term rental license, and several (Denver among them) limit short-term rentals to your primary residence. Check your city before you list. Property tax: the question of whether a short-term rental should be assessed as commercial property rather than residential has been before the legislature more than once; as of this writing, residential classification holds for most owners, but it is the Colorado item most likely to change (verify current status).
Income tax is simple by comparison: the net rental income is in federal taxable income and Colorado taxes it at 4.40%.
↑ Back to topNo. Fourteen days or fewer in the year, and you used the house as your home, means the rent is not income and nothing is deductible. Keep the records in case a 1099-K arrives.
If the average stay was seven days or less and you did most of the work yourself (keep a log), the loss is not passive and offsets your other income. With a property manager doing the work, or an average stay over seven days, it is a passive loss, allowed only under the $25,000 allowance if your income is under $150,000.
For depreciation, the lower of your cost plus improvements or the value when you convert, less land. Get an appraisal or broker opinion now. And remember the three-year window: sell within three years of moving out and the $500,000 exclusion still applies.
Only if you provide hotel-type services to guests during their stay: meals, daily housekeeping, transportation. Cleaning between guests, linens and wi-fi don’t count. Most hosts are on Schedule E with no self-employment tax.
For the Tax Shop desk · forms, code sections, and the things that get missed
The decisions that matter are made before the first guest: how you’ll track nights, who does the cleaning, what rent you charge a relative, and what the house was worth the day you moved out. Each one is a paragraph on a form in April and a few thousand dollars in either direction. Call before you list, and bring the platform statements, a calendar and the square footage after. We will tell you which schedule you are on and what Colorado wants from you besides income tax.
Call 303-734-1040 or stop by the office in Lone Tree. We’ve been reading the footnotes for Douglas County and the Denver area since 1969.
Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Last updated October 15, 2026.
