Inheriting a home can seem like a windfall—especially if it’s a beach house, a mountain cabin, or a tourist destination retreat. For a growing number of heirs, the next thought is obvious: Why not put it on Airbnb?

If you had this idea, you wouldn’t be alone. The US short-term rental (STR) market now counts over 2 million active listings and generates more than $64 billion in annual revenue, and platforms like Airbnb and VRBO have made it easier than ever to get a property up and running.

With the Great Wealth Transfer already underway, a lot of inherited real estate is going to be looking for a purpose.

But converting an inherited home into an STR isn’t as simple as updating the locks and writing a listing description. The tax rules are more complicated than most heirs expect, local regulations may have changed since the property last changed hands, and a few common mistakes can turn a promising income stream into an expensive headache. 

Here’s what’s working in your favor

First off, it’s worth understanding why converting an inherited property into an STR can be an attractive opportunity in the first place—and how it differs from buying an investment property outright.

When someone dies and leaves you a home, the IRS resets your cost basis to the fair market value of the property at the time of death. This is called the step-up in basis. If your parents bought a home for $80,000 in 1975 and it was worth $600,000 when they died, your basis is $600,000—not $80,000. You didn’t pay market price out of pocket, but for tax purposes, you’re treated as if you did. 

That reset also gives you a fresh 27.5-year depreciation schedule based on the stepped-up value, a meaningful tax shield while you’re operating the property as a rental.

“Inheriting a property allows children to obtain something that investors hardly ever receive: a complete reset of the depreciation clock at the current market value of the property,” says estate attorney Evan Farr.

Though this is a major upside, it won’t matter if you don’t document it.

Gene Bott, a CPA at Tax Hive who regularly works with inherited property clients, says the mistake comes up more often than you’d expect. 

“I’m surprised at how often I help clients prepare returns around inherited property and discover that no appraisal was done to establish fair market value at the time of inheritance,” he says. “Skipping this step could lead to tens of thousands of dollars in additional tax liabilities.”

Get an appraisal done at or around the time you inherit. Bott recommends doing it within six months of inheritance. Without it, the step-up in basis is difficult to defend if the IRS comes knocking.

This leads us to other overlooked aspects of turning an inherited property into an STR, and what traps lie in wait if you’re not careful. 

Trap No. 1: The IRS may not consider it a rental

Here’s something most new STR owners don’t realize until tax season: Depending on how you operate it, your Airbnb listing might not be a rental in the eyes of the IRS, but instead a business. That distinction carries a significant tax consequence.

The dividing line is the “seven-day rule.” If the average guest stay is seven days or less, the IRS may classify your activity as a business rather than a passive investment, which means income and expenses get reported on Schedule C rather than Schedule E.

Schedule C income is subject to self-employment tax, which is 15.3% on top of your regular rate. On a property generating $40,000 a year, that’s more than $6,000 in additional taxes that a traditional landlord wouldn’t owe.

Most Airbnb and VRBO rentals fall into this category by design. If your guests are mostly vacationers booking long weekends, you’re almost certainly under that seven-day average—which means you’re running a business whether you think of it that way or not.

Trap No. 2: Are you running this yourself?

Even if you clear the seven-day hurdle and land on Schedule E, there’s a second IRS test that catches a lot of first-time STR owners off guard: the material participation rule.

If your rental generates a loss (which is common in the early years after you factor in depreciation, repairs, and platform fees), you can deduct that loss against your regular W-2 income only if you’re “materially participating” in the operation. That means communicating with your guests, handling the marketing of the property, and coordinating everything from cleaning to maintenance. Hand all of that off to a property manager and step back, and those losses become “passive,” meaning they can only offset other passive income, not your salary. 

The 500-hour threshold is more attainable than it sounds if you’re actively involved, but it requires documentation. Keep a log, such as in a spreadsheet, including dates, times, and a brief description of what you did. 

Trap No. 3: Your rules may have changed

While an inherited property sits in probate—a process that can take months or even years—local governments don’t stand still. Cities and towns across the country have been quietly tightening STR regulations, and heirs who inherit a property, assuming it can be listed immediately, sometimes discover the legal landscape has shifted since the owner died.

These are sometimes called “zombie regulations”—ordinances that were passed while the property was in limbo and that no one thought to flag to the estate. They can take several forms: caps on the number of days a property can be rented out annually, mandatory safety inspections or equipment requirements, owner-occupancy rules that require the host to live on the property, and occupancy taxes that need to be collected and remitted to the city.

And if the property is still in probate, Farr notes there are several questions to resolve before listing: whether the executor has been granted the power to manage rentals, whether local ordinances actually permit STRs, and whether the property’s insurance policy covers guest occupancy.

“This is usually the biggest issue with short-term rentals,” Farr says, “as many localities simply don’t allow it.”

The federal bar has risen, too. The One Big, Beautiful Bill Act, passed in 2025, introduced stricter reporting requirements for rental property owners—meaning the recordkeeping standards are now more likely to draw IRS scrutiny.

If you’re going to run an STR, treat it like a business from Day 1: separate accounts, documented expenses, and clean records. (The OBBBA also made the $15 million estate tax exemption permanent—but if that applies to you, your tax attorney probably knows all this already.)

The fix is straightforward but easy to skip: Before you list, check the current STR regulations in the property’s municipality. A local real estate attorney can help, and most city and county websites publish their short-term rental ordinances. The few hours it takes to verify compliance are a lot cheaper than the fines for ignoring it.

Trap No. 4: Depreciation comes with a future tax bill

The depreciation reset mentioned earlier is a real advantage, but it’s not free money. When you eventually sell the property, the IRS will “recapture” every dollar of depreciation you’ve claimed and tax it at up to 25%. 

For most heirs planning to operate the STR for several years, the annual tax savings still outweigh the eventual recapture bill. But it’s a conversation to have with a CPA before you start taking deductions, not after.

Converting an inherited home into a short-term rental can be a smart move. You’re starting with a valuable asset, a reset tax basis, and a depreciation advantage that a typical investor doesn’t have.

But the tax rules are more complicated than most heirs expect, and the regulatory environment is tightening. Get a CPA and a local real estate attorney involved before you list, and treat the property like a business from the moment you inherit it. The opportunity is real—and so are the traps.