How Does a Midterm Rental Impact My Real Estate Tax Deductions?

If you’re renting out a property for 1 to 6 months at a time, congratulations, you’re running what’s commonly called a midterm rental. This rental style has found its sweet spot in the market: longer than a weekend Airbnb stay, but not as locked-in as a year-long lease. But when it comes to taxes, how does this affect your deductions and reporting requirements?

Here’s the short answer: Midterm rentals are generally treated like long-term rentals (LTRs) for tax purposes, which means you’re eligible for many standard rental property deductions. However, there’s a catch when it comes to deducting losses, and we’ll get into that below.

What Is a Midterm Rental?

A midterm rental typically refers to a residential property leased for more than 30 days but less than one year. They’re especially common among traveling professionals, relocating families, and temporary corporate tenants.

While the IRS doesn’t formally define “midterm rental” as a category, its treatment falls in line with long-term rental activity as long as you’re not providing substantial services, such as daily cleaning, meals, or concierge-type amenities.

How the IRS Classifies Midterm Rentals

Here’s the critical part: midterm rentals are treated similarly to long-term rentals for federal tax purposes.

This means:

• Rental income is reported on Schedule E (Form 1040)
• Expenses related to the rental can typically be deducted from your rental income
• You’re not subject to self-employment tax unless you provide substantial services
• Income and losses are generally passive, unless specific conditions are met

Common Tax Deductions for Midterm Rentals

Just like any traditional rental, you can deduct a wide range of ordinary and necessary expenses associated with operating your midterm rental.

These may include:

• Mortgage Interest: A portion of the mortgage interest on your rental property is deductible, reducing your taxable rental income.
• Property Taxes: Real estate taxes paid on rental property are deductible each year.
• Depreciation: You can depreciate the building (not the land) over 27.5 years, providing an annual deduction that helps offset your rental income.
• Insurance: Landlord or property insurance premiums are deductible as an operating expense.
• Repairs and Maintenance: Expenses for fixing things like plumbing, electrical, or HVAC systems can be deducted in the year they occur.
• Utilities: If you’re paying for electricity, water, gas, or internet as part of the rental arrangement, those costs are deductible.
• Cleaning and Turnover Costs: Even though midterm rentals don’t require frequent turnover, any cleaning or prep between tenants counts as a deductible expense.
• Furnishings and Appliances: If your property is furnished (as most mid-term rentals are), you may deduct or depreciate the cost of furniture and appliances.

Passive Activity Loss Rules

Here’s where things can get tricky. Most rental real estate activities, including midterm rentals, are considered passive under IRS rules.

That means:

• Losses from the rental can typically only offset passive income, not your regular wages or business income.
• However, there are two key exceptions where you might be able to use these losses to offset other income.

1. Special $25,000 Allowance

If you actively participate in the rental (e.g., make management decisions, approve tenants, arrange for repairs), and your modified adjusted gross income (MAGI) is $100,000 or less, you may deduct up to $25,000 of passive rental losses against non-passive income.

• This allowance phases out completely once your MAGI reaches $150,000.

2. Real Estate Professional Status (REPS)

If you qualify as a real estate professional under IRS rules, your rental activity may be treated as non-passive, allowing you to deduct all losses against any type of income.

To qualify:

• You must spend more than 750 hours per year in real estate activities, and
• It must be more than 50% of your total working time

Note: Simply owning rental property doesn’t make you a real estate professional. You need to materially participate and meet the hour thresholds.

Services Matter: When Does Your Rental Become a Business?

Another important consideration is whether you provide substantial services to tenants. If you do, the IRS might treat your rental income as business income, subject to self-employment tax.

That typically applies when you offer:

• Daily or regular housekeeping
• Meals
• Personal services
• Hotel-like amenities

Midterm vs. Short-Term vs. Long-Term Rentals

Key Takeaways for Landlords and Investors

• Midterm rentals are treated like long-term rentals under federal tax rules.
• Losses are usually passive, but may be deductible against other income if you qualify for the special allowance or REPS.
• You’re eligible to deduct common expenses like depreciation, property taxes, insurance, and maintenance.
• Avoid providing hotel-like services unless you’re ready for a different tax structure.

Frequently Asked Questions