Which Expenses Survive a Mixed-Use STR Personal-Use-Day Allocation and Which Ones Get Wiped Out

You closed on a mountain cabin, rented it out most of the year, and used it yourself for a couple of weeks over the holidays. Sounds straightforward. Then your CPA sends back a return where half your mortgage interest disappeared and your depreciation deduction shrank to almost nothing. You are left wondering: what happened to all those expenses?

The answer lives inside IRC §280A, and it is more nuanced than most hosts realize. When a short-term rental has personal use days, the IRS runs every expense through an allocation test. Some costs survive that test mostly intact. Others get shredded. Knowing which is which, before you book that personal week, can change your tax picture by tens of thousands of dollars.

TL;DR: Under IRC §280A, "rental-only" expenses (mortgage interest, property taxes) are always deductible in proportion to rental days. Direct rental expenses (cleaning, OTA fees, repairs made during rental periods) survive fully. But operating expenses shared between personal and rental use, including depreciation, are allocated by a ratio of rental days to total days used, and if personal use pushes you past the 14-day or 10% threshold, depreciation gets wiped out entirely in the current year.

Jennifer Beadles is a real estate investor and short-term rental owner who uses the STR loophole on her own properties. She writes from hands-on operating experience plus current IRS guidance (IRC §469 and Treas. Reg. §1.469-1T(e)(3)(ii)(A)).

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How the IRS Splits Expenses When You Have Personal Use Days

The allocation math kicks in the moment you cross into "personal residence" territory under IRC §280A(d)(1): that happens when personal use exceeds the greater of 14 days or 10% of the days the property was actually rented at fair market value.

If you stay under that threshold, good news. Your property is still treated as a rental, and you can deduct all ordinary and necessary rental expenses subject to the passive activity rules (or non-passive treatment if you qualify under the STR loophole). For a deeper look at exactly what the IRS counts as a personal use day, see our post on what the IRS counts as personal use days for STRs.

Cross that threshold, though, and §280A flips the property into "personal residence" status. Now your deductions must run through a three-tier waterfall, and the order matters enormously.

Tier 1: Always deductible (subject to allocation)

Mortgage interest and property taxes are deductible regardless of rental income, but only in proportion to the rental days. The formula is simple:

Rental days ÷ (Rental days + Personal use days) = deductible percentage

These expenses are never "wiped out" entirely, they just get trimmed. Whatever rental-use percentage you compute, that share goes on Schedule E. The personal-use share of mortgage interest moves to Schedule A as an itemized deduction (if you itemize). Property taxes similarly split.

Tier 2: Direct rental expenses survive fully

Costs you incur solely because of rental activity, like Airbnb or VRBO platform fees, guest supplies, professional photography for your listing, a deep cleaning done specifically between guest stays, and repairs made during rental periods only, are fully deductible against rental income. They do not get prorated by personal-use days because they have zero personal-use component.

This is good news for most hosts. Your OTA commissions, your cleaners' invoices, your property manager fees, and your guest-facing supplies are not diluted by the days you used the property yourself. For a full breakdown of every deduction category, our STR tax deduction checklist for 2026 is the place to start.

Tier 3: Operating expenses and depreciation, allocated and capped

Here is where it gets painful. Utilities, insurance, general maintenance, and depreciation are shared expenses. They must be allocated between rental and personal use by the same ratio: rental days divided by total days used.

More critically, these Tier 3 deductions are capped at the rental income left over after Tier 1 and Tier 2 deductions. If your rental income is already eaten up, depreciation and shared operating costs simply cannot be deducted in the current year. They do not carry over to offset W-2 income. They sit there, unused.

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The Two Allocation Methods: Bolton vs. the IRS

There are actually two competing methods for splitting Tier 1 expenses, and the difference is not small.

The IRS method uses rental days divided by total days in the year (365). So if you rented 200 days and personally used 20 days, the IRS says only 200/365 (about 54.8%) of mortgage interest is a rental deduction.

The Bolton method, from the Tax Court case Bolton v. Commissioner, 694 F.2d 556 (9th Cir. 1982), uses rental days divided by total days actually used (rental plus personal). In the same example: 200/(200+20) = 90.9%.

The Bolton method pushes more mortgage interest and property taxes into Tier 1, which means more rental income remains after Tier 1, which means more room for Tier 3 depreciation. In practice, Bolton produces a larger depreciation deduction. The IRS has not conceded this point and may challenge it on audit, so talk to your CPA before choosing a method. But it is legally available, at least in circuits that have adopted it.

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Worked Example: What the Numbers Actually Look Like

Assume the following for a lakehouse STR:

• Purchase price (depreciable basis): $400,000
• Annual rental income: $60,000
• Rental days: 180
• Personal use days: 22 (exceeds 14-day threshold, so §280A applies)
• Mortgage interest: $18,000
• Property taxes: $4,500
• OTA fees + cleaning (direct rental): $9,000
• Utilities + insurance (shared): $8,000
• Annual straight-line depreciation: $14,545 (approx. $400,000 / 27.5 years)

Step 1: Compute the allocation ratio (IRS method) Rental days / (Rental + Personal days) = 180 / 202 = 89.1%

Step 2: Tier 1 deductions (mortgage interest + property taxes)

• Mortgage interest: $18,000 x 89.1% = $16,038 on Schedule E
• Property taxes: $4,500 x 89.1% = $4,010 on Schedule E
• Total Tier 1: $20,048

Step 3: Tier 2 deductions (direct rental costs)

• OTA fees + cleaning: $9,000 (no proration needed)

Step 4: Rental income remaining after Tiers 1 and 2 $60,000 - $20,048 - $9,000 = $30,952

Step 5: Tier 3 deductions (shared operating + depreciation)

• Utilities + insurance: $8,000 x 89.1% = $7,128
• Depreciation: $14,545 x 89.1% = $12,960
• Total Tier 3: $20,088

Rental income after Tier 3: $30,952 - $20,088 = $10,864 net rental income

In this example, the personal-use days hurt but do not destroy the depreciation deduction, because there is enough rental income left. The net result is a $10,864 taxable profit, not a loss.

Now compare if you had zero personal use days. Same property, same income, no §280A cap. Depreciation at full $14,545, all expenses fully deductible. You would likely show a paper loss that, under the STR loophole, offsets W-2 income dollar for dollar. The 22 personal days did not just reduce a deduction. They converted a W-2-offsetting loss into taxable rental income.

That is the real cost of personal use days for an STR investor.

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Which Expenses Survive vs. Which Get Wiped Out: A Quick Reference

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The STR Loophole and Why Personal Use Days Are Especially Costly

Here is why this matters beyond just the deduction math.

The STR loophole, grounded in Treas. Reg. §1.469-1T(e)(3)(ii)(A), treats your rental as a trade or business rather than a passive rental activity, as long as the average guest stay is 7 days or fewer. That means losses from your STR offset W-2 income directly, no real estate professional status required, no 750-hour test needed.

But that non-passive loss only exists if there is a loss to begin with. Personal use days chip away at deductions and cap depreciation under §280A, and if the cap kicks in hard enough, your paper loss evaporates. You are left with income to report and no loss to offset your salary.

For STR owners pursuing this strategy, keeping personal use under the 14-day or 10% threshold is not just a nice-to-have. It is often the difference between a $30,000 W-2 offset and a $10,000 tax bill.

Our dedicated post on personal use days and the STR loophole walks through the full strategy for staying on the right side of that line.

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Bonus Depreciation Still Works, But Only If You Preserve the Loss

One more thing worth knowing. Under the One Big Beautiful Bill Act, signed in July 2025, 100% bonus depreciation is now permanent for qualified property with a recovery period of 20 years or less, for property acquired and placed in service after January 19, 2025. A cost segregation study on your STR can reclassify 25 to 35% of your depreciable basis into 5-, 7-, and 15-year property, all eligible for that 100% first-year deduction under IRC §168(k).

That is a powerful tool. But if personal use days trigger the §280A cap and deprive you of the ability to deduct depreciation in the current year, bonus depreciation does you no good in year one. The big paper loss from cost segregation gets shelved.

Run the numbers before booking that personal stay. You can use our cost segregation calculator to see what a cost seg study would generate for your specific property, then think about whether personal use days would cap the deduction before it ever hits your return.

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Tracking Hours When You Have Personal Use Days

One practical note: if you are using the STR loophole and you spend time at the property personally, those personal days do not count toward material participation. Time you spend there as a guest is not time you spent managing the business. The STR Loophole app is built to help you log qualifying management hours cleanly, separate from any personal stays, so your hour log holds up if the IRS ever asks.

For the full picture on what activities count toward material participation and how to document them, see our guide on what activities count toward STR material participation.

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Key Takeaways

• Direct rental expenses (OTA fees, cleaning, repairs during rental periods) survive fully and are not prorated.
• Mortgage interest and property taxes are always deductible, but only in proportion to rental days.
• Depreciation and shared operating costs are prorated AND capped at remaining rental income after higher-tier deductions.
• Crossing the 14-day or 10% personal-use threshold under §280A does not just reduce deductions. It can eliminate the non-passive loss that makes the STR loophole valuable.
• The Bolton method may allow a more favorable Tier 1 allocation in some circuits, preserving more room for depreciation.
• Bonus depreciation under IRC §168(k) is permanent for property acquired after January 19, 2025, but only helps if personal-use caps do not swallow the depreciation deduction first.

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Bottom Line

If you are using the STR loophole to offset W-2 income, personal use days are not just an aesthetic tax issue. They are a structural threat to the strategy. Keep personal use under 14 days or 10% of rental days. Track which expenses fall into which tier. And before you take that bonus depreciation from a cost seg study, make sure your personal-use situation does not cap the very deduction you are trying to claim. Your CPA can model both scenarios, and the difference in real dollars is often large enough to change your vacation plans.

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FAQ

Q: Does mortgage interest disappear completely if I have too many personal use days? A: No. Under IRC §280A, mortgage interest is always deductible in some proportion. The rental-use portion goes on Schedule E; the personal-use portion moves to Schedule A as a home mortgage interest deduction if you itemize. It gets reduced, not eliminated.

Q: What happens to depreciation I can't deduct because of the §280A income cap? A: Under the personal residence rules, unused depreciation deductions due to the income cap do not carry forward as a rental loss. They are simply not deductible that year. This is one of the starkest differences between staying under the personal-use threshold (where the STR loophole can generate a full non-passive loss) and crossing it.

Q: Can I use the Bolton method on my tax return? A: Bolton v. Commissioner is binding in the Ninth Circuit, and many taxpayers in other circuits have also used it. The IRS prefers its own method, which produces a smaller rental deduction. Using Bolton creates audit risk and should only be done with a CPA who understands the case and your jurisdiction.

Q: If I cross the 14-day threshold, do I lose the STR loophole entirely? A: The average-stay test for the STR loophole under Treas. Reg. §1.469-1T(e)(3)(ii)(A) is separate from the personal-use threshold under IRC §280A. You can still have a property whose average guest stay is 7 days or fewer (qualifying for non-passive treatment) while also having too many personal use days (triggering §280A limits). The loophole survives, but the deductions it passes through become much smaller or disappear under the cap.

Q: Are repairs I do during a personal-use period deductible at all? A: No. Repairs made during personal-use periods are not deductible as rental expenses. Only repairs made during or specifically for rental periods qualify. This is an easy audit target if your log is not clear about dates.

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Sources

• IRC §280A, Personal Use of Dwelling Unit
• IRC §469, Passive Activity Loss Rules
• IRC §168(k), Bonus Depreciation
• Treas. Reg. §1.469-1T(e)(3)(ii)(A), 7-Day STR Exception
• IRS Publication 527, Residential Rental Property
• Bolton v. Commissioner, 694 F.2d 556 (9th Cir. 1982)

This article is for educational purposes only and is not tax or legal advice. Talk to a CPA who knows short-term rentals before you act on it.