Hospitality & Short-Term Rentals
If you run an Airbnb, VRBO, or bed and breakfast in Frederick County, your property may not be taxed like a typical rental at all — and that difference can be worth tens of thousands of dollars depending on how it's handled.
Most landlords assume all rental property falls under the same passive activity rules. Short-term rental owners are often surprised to learn that isn't necessarily true. A specific provision in the tax code treats short-term rentals differently from long-term rentals in a way that can change whether your losses are usable right away or stuck waiting on the sidelines.
If you operate a hotel, bed and breakfast, or short-term rental anywhere in Frederick County or central Maryland, here's what's actually going on — and the local tax detail that catches almost every new host off guard.
Under the general passive activity loss rules, rental property is automatically classified as passive, meaning losses can typically only offset other passive income — not your salary or business income. But a specific Treasury regulation carves out an exception: if the average length of a guest's stay is seven days or fewer, the activity isn't classified as a rental activity at all. Instead, it's treated as a trade or business.
This distinction matters enormously. If you materially participate in that business — meaning you're genuinely involved in running it, not just collecting checks from a hands-off arrangement — losses from the property can offset your other income directly, without the $25,000 cap or income phase-out that applies to typical rental losses.
This is sometimes called the short-term rental "loophole," but it isn't a loophole at all — it's a specific, well-established rule that simply requires you to actually meet its conditions and document that you did.
This isn't based on your listing's minimum-night requirement — it's based on your actual bookings for the year. You take your total rented nights and divide by the number of separate stays. If your property was booked for 200 total nights across 30 separate reservations, your average stay is roughly 6.7 nights, which qualifies. A property advertised as a "weekly rental" that ends up with several extended-stay guests averaging 12 nights would not qualify under this rule, even if most bookings were shorter.
There's a second path as well: properties with an average stay of 30 days or fewer can still qualify if you provide substantial guest services — daily cleaning, linen changes, meals, or concierge-style assistance — similar to what a hotel offers, rather than what a typical rental provides.
Qualifying under the stay-length test only gets you halfway there. You also need to materially participate in the activity, which the IRS evaluates against several specific tests. The two most commonly used by short-term rental owners are:
Using a full-service property manager who handles essentially everything, while you claim material participation yourself, is one of the most common red flags in this area. If your records show your manager logging more hours than you, the position becomes very difficult to defend.
Documentation built after the fact rarely holds up. The strongest position comes from contemporaneous records — a running log of dates, tasks, and hours, kept as you go rather than reconstructed at tax time.
Because short-term rentals that qualify under the 7-day rule are treated as nonresidential property rather than residential rental property, they're depreciated over 39 years instead of the usual 27.5 years for long-term residential rentals. On its own, that sounds worse — but it opens the door to Section 179 expensing and bonus depreciation on qualifying components of the property, which can accelerate a meaningful portion of your deductions into the property's early years rather than spreading them out.
Many owners pair this strategy with a cost segregation study, which breaks a property into components with different depreciable lives, to maximize the deduction available in the year the property is placed in service.
Separate from any of this, there's a real local compliance obligation that catches almost every new host by surprise: Frederick County imposes its own 5% Hotel Room Rental Tax on stays of 90 consecutive days or fewer, on top of Maryland's statewide 6% sales and use tax on lodging. This applies whether you're running a traditional bed and breakfast or a single short-term rental listed on Airbnb or VRBO.
A few details worth knowing:
If your property is in Montgomery County instead, the local rate and rules differ — Montgomery County's Room Rental-Transient Tax is 7% and applies to stays of 30 days or fewer, with its own separate registration and licensing requirements through the Department of Housing and Community Affairs.
Even if Airbnb or VRBO is collecting Maryland's state sales tax for you automatically, that doesn't necessarily mean your county's hotel tax is being handled. These are separate obligations, and it's worth confirming exactly which ones your platform actually covers rather than assuming everything is taken care of.
A short-term rental host in Frederick County is potentially navigating three separate layers at once: the federal passive-versus-active classification of any losses, accelerated depreciation strategy if a cost segregation study makes sense, and local hotel tax registration and filing. Getting one piece right while missing another is a common and costly mistake.
At Mercer Flanagan, we work with hotel, B&B, and short-term rental owners throughout Frederick County and central Maryland to determine whether the 7-day rule genuinely applies to your situation, set up bookkeeping that supports your material participation position, and stay current on both state and county lodging tax obligations.
Book a free consultation and we'll walk through your specific situation — no pressure, no obligation.
Book a Free ConsultationNo. Listing on a platform like Airbnb or VRBO doesn't automatically qualify you. The rule depends on your actual average guest stay across the year and whether you materially participate in running the property — both have to be calculated and documented, not assumed.
Possibly. Maryland's 6% state sales tax and Frederick County's 5% Hotel Room Rental Tax are separate obligations. Some platforms remit one but not the other, so it's worth confirming directly with your platform and the county rather than assuming everything is covered.
Yes, but your own hours generally need to meet one of the IRS material participation tests — commonly either 100+ hours with no one else, including your manager, spending more time than you, or 500+ hours regardless of anyone else's involvement.
By Roy Cogliandolo, CPA · Mercer Flanagan · February 6, 2026
This article is for general informational purposes and reflects tax rules current as of 2026. Local tax rates and rules vary by county and are subject to change — confirm current requirements with your CPA and local government before relying on this information.