Qadosh literally means "to be set apart for a special purpose". A related word, qedesh, is one who is also set apart for a special purpose but not in the same way we think of "holy" but is a male prostitute (Deut 23:17).
Israel was qadosh because they were separated by the other nations as servants of God. The furnishings in the tabernacle were qadosh as they were not to be used for anything except for the work in the tabernacle. While we may not think of ourselves as "holy" we are in fact set apart from the world to be God's servants and representatives."