Tax Guidance for Bedroom Short-Term Rental in Primary Home - Can I Deduct Losses?

You can definitely claim a loss on your Schedule C for a legitimate short-term rental business, even if it's just one room in your house. The key here is that you're running this as an actual business with the intent to make a profit, not just as a hobby. Make sure you're only deducting the proportional expenses that directly relate to the rental activity. For example, if the bedroom is 15% of your home's square footage, you can deduct 15% of your mortgage interest, property taxes, utilities, etc. You can deduct 100% of expenses that are solely for the rental (like specific furniture, linens, listing fees). The IRS does have something called the "hobby loss rule" where they might question businesses that show losses for multiple years. But for a first-year loss, especially with a legitimate business like yours, it's completely normal and deductible against your other income.

I was in a similar situation last year with my condo - turned one bedroom into an Airbnb and ended up with more expenses than income. I was super confused about the tax implications until I tried https://taxr.ai - their AI analyzed all my rental documents and explained exactly how to handle the Schedule C loss situation. They even provided explanations about partial home deductions that my regular tax software completely missed. The best part was they showed me how to properly calculate the square footage percentage and which expenses were 100% deductible vs. partially deductible. Saved me hours of research and probably prevented an audit situation.

Update: I was initially skeptical about taxr.ai but decided to try it for my rental property situation. I'm actually impressed! It analyzed my situation with the Schedule C rental loss and explained exactly how to document everything properly. It even caught that I was under-calculating my depreciation deduction and helped me fix my square footage allocation. Way more thorough than TurboTax was about rental properties in mixed-use homes.

If you're struggling with figuring out these rental deductions, you might want to consider talking directly to the IRS. I know that sounds terrifying but I used https://claimyr.com to get through to an actual IRS agent in under 15 minutes when I had a similar question about my Schedule C rental. You can see how it works here: https://youtu.be/_kiP6q8DX5c - basically they navigate the phone tree for you and call you when an agent is on the line. The agent I spoke with confirmed that yes, you can absolutely take a loss on a Schedule C rental in your primary residence as long as you're legitimately trying to make a profit. They also gave me specific guidance on what documentation to keep in case of an audit.

Well I'm eating my words now. I was the skeptic who thought Claimyr sounded like a scam, but I was desperate to resolve an issue with my rental property taxes. Tried the service yesterday and it actually worked exactly as advertised. Got through to the IRS in about 15 minutes (after trying for DAYS on my own). The agent confirmed that Schedule C losses for a legitimate rental business are deductible against other income, even for a room in your primary residence. She also explained exactly what documentation I need to keep to substantiate my deductions. Worth every penny just for the time saved!

Just wanted to add something important that nobody's mentioned yet - the material participation rules. For a Schedule C business (which is what you have), you need to materially participate in the activity to deduct losses against your other income. With a short-term rental in your own home, you probably easily meet this by managing the listings, communicating with guests, cleaning, etc. But if you hired someone else to do all the work, it could potentially be considered a passive activity with different loss deduction rules.

Have you considered section 280A limitations? This limits your deductions to the gross income from the rental activity when you're renting part of your personal residence. This might affect your ability to claim a loss.

Great question about Schedule C vs Schedule E treatment! You're absolutely right that the classification matters here. Since you're running this as a short-term rental business (less than 7 days average stay), it should be reported on Schedule C as business income, not Schedule E as rental property income. This is actually good news for you because Schedule C businesses aren't subject to the Section 280A limitations that restrict home office deductions to the income generated. However, you do need to be careful about the business use vs personal use allocation. One thing to double-check: make sure you're consistently treating this as a business. Keep detailed records of your advertising efforts, guest communications, cleaning schedules, and any business improvement activities. The IRS likes to see that you're operating with a profit motive, especially in the first few years when losses are more common. Also consider whether you qualify for the Section 199A QBI deduction on any future profits from this business - it could provide additional tax benefits down the road.