The Short-Term Rental Loophole, Explained

If the average guest stay is 7 days or less (or 30 days or less with substantial services), the activity is not treated as a 'rental' under Sec. 469. Material participation alone — typically 100+ hours and more than anyone else — makes losses non-passive.

Combined with cost segregation and bonus depreciation, a high-earning W-2 household can buy an STR, complete a cost seg study, materially participate, and shelter substantial W-2 income in the acquisition year.

Total nights rented divided by total reservations. A handful of long stays can blow the average over 7 days even if most stays are short. Track this monthly.

Most STR owners qualify via the 'more than 100 hours and more than anyone else' test. If you use a property manager who does more, you may fail this test even with substantial hours of your own.

Aggressive hour estimates with no log. Personal-use days not properly tracked (>14 days converts the property to a residence). Property managers logging more hours than the owner. Misclassified long-term tenants.

The IRS has begun examining this aggressively. Average-stay calculations, material participation logs, and personal-use day tracking all need to be airtight before you take the deduction.