Short-Term Rental Tax Rules Every Key West Owner Should Know

If you own a cottage, conch house, or condo in Key West and rent it out on Airbnb or VRBO, the tax side of that income is more complicated than most owners expect. Between local licensing, county lodging tax, and IRS rules that change depending on how you run the property, it’s easy to get this wrong in a way that costs money at tax time.

Here’s what actually matters for short-term rental owners in Key West.

You’re probably licensed and taxed at three levels, not one

Short-term rentals in Key West sit under overlapping rules from the city, Monroe County, and the state:

• City of Key West requires a transient rental license, and the city caps the total number of licenses available. If you’re renting without one, that’s a compliance problem separate from taxes.
• Monroe County collects a tourist development tax on top of state sales tax.
• Florida requires sales tax and, depending on the platform, transient rental tax collection and remittance.

Airbnb and VRBO collect and remit some of these taxes automatically in Florida, but not always all of them, and not always correctly for Monroe County specifically. Don’t assume the platform has it covered. Pull your statements and check what’s actually being remitted versus what you’re still on the hook for.

Schedule E or Schedule C: this decision changes your tax bill

Most rental income lands on Schedule E as passive income, which isn’t subject to self-employment tax. But the IRS treats your Key West rental differently if either of these applies:

• Average guest stay is 7 days or less (or 30 days or less if you provide “substantial services” like daily cleaning, linen changes during the stay, or concierge-style booking)
• You’re materially participating in running it like a hospitality business rather than a rental

When that’s the case, the activity often gets treated as a trade or business, which can mean Schedule C and self-employment tax on the net income. For a property that’s cash-flowing well during peak season, that distinction can mean thousands of dollars in additional tax owed. This is worth reviewing before you file, not after.

Depreciation is where most Key West owners leave money on the table

Short-term rental property, especially waterfront or historic homes common in Old Town, can carry significant value in the structure, furnishings, and site improvements. A cost segregation study breaks the property into components with shorter depreciation schedules, which can accelerate deductions well beyond straight-line depreciation on the building alone.

This matters even more if you materially participate in the rental and qualify to treat losses as non-passive, since that opens the door to using rental losses against other income. It’s a strategy that needs to be set up correctly from the start, not added on later.

Hurricane season adds a layer most owners don’t plan for

Key West short-term rentals carry real exposure during hurricane season, both in lost booking income and in casualty losses if a storm causes damage. Keep clean records of:

• Cancelled bookings and refunded income tied to storm closures or evacuation orders
• Repair costs versus improvements (they’re treated differently for tax purposes)
• Insurance reimbursements, which affect how a casualty loss deduction is calculated

Owners who track this as it happens have a much easier time at tax season than owners trying to reconstruct it in March.

Quarterly estimated taxes catch STR owners by surprise

If your rental is netting real income and there’s no withholding happening anywhere, the IRS still expects estimated payments during the year. Peak season income (roughly December through April in Key West) followed by a slower season means your cash flow and your tax liability don’t move together. Planning quarterly payments around that seasonal pattern, rather than treating it as a flat 25% each quarter, keeps you from a cash crunch in a slow month.

The bottom line

Short-term rental income in Key West isn’t just rental income. It’s a licensing question, a county and state tax question, a federal classification question, and often a depreciation strategy question, all at once. Getting the Schedule E versus Schedule C call wrong, or missing a cost segregation opportunity, is common and expensive.

If you own or are considering a short-term rental in Key West, it’s worth a conversation before the next filing deadline rather than after.