The measure is among several floated by the NSW government as it contends with declining housing affordability and rising rough sleeping, particularly in areas popular with tourists.
Non-hosted short-term rentals make up more than five per cent of homes in the council areas covering Byron Bay, the Alps and the NSW south coast.
As well as incentives to property investors, the discussion paper released on Thursday invites feedback on introducing a levy on each booking as done in Germany, France and the United States.
More restrictive day caps for non-hosted short-term rental accommodation and revenue measures on all forms of short-term rental accommodation are also on the government's mind.
While wanting to protect the positive role short-term rentals play in the tourism economy, the NSW government said it wanted to balance it with costs to housing affordability.
All options were on the table, Housing Minister Rose Jackson said.
"We're determined to do everything we can to tackle the housing crisis and put every part of the housing market under the microscope for options to encourage a greater supply of long-term rental accommodation," she said.
Dangling a carrot in front of Airbnb owners has also been an approach used by Western Australia, which from 2025 will offer $10,000 to investors who lease their properties to long-term tenants.
Victoria, meanwhile, expects to raise $70 million a year by slugging tourists 7.5 per cent on all short-term rental accommodation bookings from 2025.
The state also levies a vacancy tax in inner and middle Melbourne as a way to open up housing options.
NSW has about 95,000 residential properties not used for long-term housing including 35,000 used as non-hosted short-term rentals throughout the year.
Another 45,000 homes are used as holiday homes and 15,000 are left vacant throughout the year.
The debate over the future of short-term rentals comes ahead of the cap on non-hosted short-term rentals in Byron Shire being reduced from September to 60 days per year.
Exceptions exist for Byron Bay Town Centre and Brunswick Heads, as well as properties rented for longer than 21 days at a time.
About 1250 of the 15,000 private dwellings in Byron Shire are registered as non-hosted short-term rentals.
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