Denver STR Tax Guide: Why the STR Loophole Doesn’t Work Here

Most of our city guides explain how to make the short-term rental loophole work in a market. This one explains why it does not work in Denver, because it is the kind of thing buyers discover after closing.

The reason is not a tax rule. It is Denver's licensing rule, and it collides with a tax rule. The details of Denver's licensing, lodging taxes and enforcement are HostReady's territory, published with a link to the government page each rule comes from, so this guide covers only the part that decides the tax outcome.

Why the strategy fails in Denver

The strategy investors run elsewhere needs three things: a property rented to guests for an average of seven days or less, an owner who materially participates, and depreciation, usually accelerated by a cost segregation study, that turns into a loss the owner can use against wages (how the STR loophole works).

Denver's rule removes the third. A licensed short-term rental has to be the host's primary residence: the place they live and usually return to, and a person has only one. And a home you live in is, for tax purposes, a dwelling you use as a residence. Once your personal use of a unit passes the greater of 14 days or 10% of the days it is rented at a fair price, the tax code caps the rental deductions at the rental income. Expenses above that are carried forward, not deducted. Living there for most of the year is far past that line.

So a Denver short-term rental can reduce the tax on its own income, but it cannot produce a loss to offset your salary. That loss was the point of the cost segregation study, the bonus depreciation and the hours log.

What about an accessory dwelling unit?

Denver's one exception lets you live in the main house and rent an accessory dwelling unit on the same lot. It does not work the other way round: you cannot live in the ADU and rent the main house, and the second unit of a duplex does not qualify.

Whether a rented ADU is its own dwelling unit for the personal-use limit, separate from the house you live in, depends on the facts. The tax definition of a dwelling unit includes structures appurtenant to it. Do not assume the ADU escapes the cap without your CPA confirming it for your property, and keep a clean record of the ADU's own bookings, days and expenses so the question can be answered.

What Denver investors do instead

Buy the short-term rental somewhere else. The strategy depends on local rules as much as tax rules, and many mountain and resort markets license non-owner-occupied short-term rentals. Check the specific address before assuming a whole county allows it.

Rent in Denver for 30 days or more. Rentals of 30 days or longer fall outside Denver's short-term rental rules. For tax purposes they are ordinary rental activities, so losses are passive: they offset passive income, carry forward, and are released when you sell. An owner who actively participates may deduct up to $25,000 of those losses against other income, but that allowance phases out between $100,000 and $150,000 of modified adjusted gross income, which is where most people running this strategy already are.

Qualify as a real estate professional. That turns rental losses non-passive, but it requires more than 750 hours a year in real property businesses and more than half your working time. It is rarely available to someone with a full-time job.

If you host in your own Denver home

Plenty of Denver residents do host legally, and the record-keeping still matters, just differently:

• Count rental days and personal days. Expenses for the home are split between them, so both numbers need to be right.
• Know the 14-day rule. If a home you live in is rented for fewer than 15 days in the year, the rental income is not taxable at all and no rental expenses are deducted.
• Keep rental-only costs separate: platform fees, guest supplies, cleaning between stays, and the license fee.

Colorado's income tax follows the federal code, including bonus depreciation. A 2026 bill to decouple Colorado from bonus depreciation did not pass. That matters for Colorado investors whose rentals are outside Denver.

What to keep for a Denver rental

None of this is decided by where the property is. It is decided by what you can show. For a Denver property, that means:

• Every booking with its dates, so the average stay can be calculated rather than asserted.
• Your hours, logged as you work them, with the date, the task and the property, and a reasonable estimate of anyone else's hours on the same property.
• Every trip to the property with its purpose, because a drive to fix a hot tub and a weekend away look the same on a credit card statement.
• Receipts attached to the expense they support, including the license and permit fees above.
• For an ADU, its own bookings, days and expenses, kept apart from the main house.

DeductFlow keeps all of it together, property by property, so your CPA sees the records behind the strategy instead of a summary of it.