Regulatory Risks in Real Estate Subletting: How Court Decisions Could Disrupt Short-Term Rental Returns

The 2025 federal regulatory landscape for real estate subletting is undergoing a seismic shift, driven by Supreme Court rulings, legislative changes, and state-level enforcement actions. For investors relying on short-term rental (STR) income, the interplay between judicial decisions and evolving compliance requirements is creating both uncertainty and opportunity. This analysis explores how recent court decisions and policy changes could reshape the financial viability of subletting strategies, with a focus on the implications for real estate returns.

The Supreme Court's Shadow Docket and Eviction Policy

The U.S. Supreme Court's 2025 rulings have already begun to redefine the legal framework for property management. In Chevron USA Inc. v. Plaquemines Parish, Louisiana, the Court's decision on whether oil companies can transfer environmental lawsuits to federal court signals a broader trend of limiting state regulatory authorityTop cases to be heard during US Supreme Court's 2025-2026 term^[1]. While this case does not directly address subletting, it underscores a judicial inclination to favor corporate interests in federal forums, potentially emboldening landlords to challenge state-level restrictions on STRs.

More directly impactful is the Court's ruling on eviction moratoria, which requires explicit congressional backing for eviction policiesSupreme Court Ruling in 2025 Could Bankrupt Thousands of…^[2]. This decision has left landlords—particularly small property owners—vulnerable to financial instability, as they can no longer rely on executive actions to protect rental income during crises. According to a report by United States Real Estate Investor, this ruling could “bankrupt thousands of landlords overnight” by limiting their ability to recover unpaid rentSupreme Court Ruling in 2025 Could Bankrupt Thousands of…^[2]. For investors in subletting markets, this highlights the need to diversify income streams and secure legislative support for eviction protections.

Tax Policy and the One Big Beautiful Bill Act (OBBBA)

The OBBBA, signed into law on July 4, 2025, has introduced both incentives and constraints for real estate investors. The reinstatement of 100% bonus depreciation for qualifying assets placed in service after January 19, 2025, offers immediate tax benefits for property improvements, making subletting arrangements more financially attractivePart One: One Big Beautiful Bill Act – Impact on Real Estate…^[3]. However, the legislation's modifications to interest expense deductions could offset these gains. By altering the sequencing of interest deductions, the OBBBA may reduce the deductibility of interest for leveraged real estate projects, increasing effective tax rates for investorsPart One: One Big Beautiful Bill Act – Impact on Real Estate…^[3].

For STR operators, the OBBBA's tax incentives are a double-edged sword. While 100% depreciation allows hosts to write off furniture and appliances, the same legislation's stricter compliance requirements for affordable housing programs—such as the expanded Low-Income Housing Tax Credit (LIHTC)—could divert capital from subletting ventures to socially mandated investmentsPart One: One Big Beautiful Bill Act – Impact on Real Estate…^[3].

State-Level Regulations and Compliance Costs

State and local governments have intensified their focus on STRs in 2025, with 328 state-level bills under consideration and 66 expected to pass2025 Short-term Rental Regulations Predictions^[4]. For example, Michigan's proposed 6% excise tax on STR occupancy and registration requirements could reduce net returns by up to 15% for hosts in high-demand markets2025 Short-term Rental Regulations Predictions^[4]. Similarly, Chicago's enforcement of a 4% STR tax led to a 16.4% decline in active Airbnb listings, as operators either exited the market or reduced new listings2025 Short-term Rental Regulations Predictions^[4].

These regulatory trends are compounded by the Department of Housing and Urban Development's (HUD) updated HOME Investment Partnerships Program, which emphasizes tenant rights and streamlined rental assistanceHUD Publishes HOME Final Rule^[5]. While not directly targeting subletting, this rule could influence interpretations of subletting obligations in federally assisted housing, potentially limiting investors' flexibility.

Strategic Implications for Investors

The confluence of judicial, legislative, and regulatory changes demands a proactive approach to risk management. Investors must:
1. Lobby for Legislative Clarity: Given the Supreme Court's emphasis on congressional backing for eviction policies, investors should advocate for state-level legislation that protects subletting rights.
2. Diversify Income Streams: Relying solely on STRs is increasingly risky. Investors should explore hybrid models that combine long-term leases with seasonal subletting.
3. Optimize Tax Strategies: Leverage OBBBA's bonus depreciation while mitigating the impact of interest deduction changes through cost segregation and tax-deferred exchanges.
4. Monitor Local Regulations: With 78 municipalities in Puerto Rico alone having varying STR rules, investors must stay attuned to local enforcement trends2025 Short-term Rental Regulations Predictions^[4].

Conclusion

The 2025 regulatory environment for real estate subletting is marked by volatility and complexity. While the OBBBA provides tax incentives to boost investment, Supreme Court rulings and state-level regulations are creating headwinds that could erode returns. Investors who navigate these challenges with strategic foresight—balancing compliance, advocacy, and financial optimization—will be best positioned to thrive in this evolving landscape.