How the Short-Term Rental (STR) Loophole Can Save You Thousands in Taxes
"You can’t build wealth on wages alone. Real estate gives you the freedom to own your time." - Unknown
Introduction:
If you own or are considering purchasing a short-term rental (STR), there is a powerful tax strategy that could help you save thousands of dollars—without requiring you to become a full-time real estate professional.
This strategy, known as the Short-Term Rental (STR) Loophole, allows you to:
Use STR tax losses to offset W-2 or business income
Claim significant depreciation deductions
Avoid the stringent real estate professional status (REP) rules
This is a highly effective tax strategy for investors looking to retain more of their rental income. Below is a detailed breakdown of how you can leverage this tax advantage.
What is the STR Loophole and Why is it Important?
Typically, rental income is classified as passive, meaning that rental losses cannot offset active income (such as wages or business profits) unless you qualify as a real estate professional, which requires at least 750 hours annually in real estate activities.
However, STRs are treated differently. The IRS considers them an active business rather than passive real estate—provided specific criteria are met.
This distinction allows STR owners to apply tax deductions from their rental property to reduce their overall taxable income, even if they have a full-time job or another business.
How to Qualify for the STR Loophole
To benefit from this strategy, your STR must meet two key IRS requirements:
1. The 7-Day Rule
Your STR must maintain an average guest stay of seven days or fewer per booking to qualify.
If most guests book for three to five nights, the property meets the requirement.
If the average stay exceeds seven days, the IRS may classify it as a long-term rental, eliminating STR tax benefits.
Strategy Tip: If guest stays approach or exceed seven days, consider implementing a minimum stay requirement of five to six nights to maintain compliance.
2. The Material Participation Rule
To demonstrate active involvement, you must meet at least one of the following criteria:
Work 500+ hours annually on STR-related activities (e.g., managing, cleaning, guest communication).
Work 100+ hours and more than any other individual (including cleaners, co-hosts, or property managers).
Be the sole manager of the property, ensuring that no one else contributes more hours than you.
Qualifying Activities Include:
Guest communication
Cleaning and restocking supplies
Property repairs and maintenance
Managing listings and pricing
Handling bookings and check-ins
Non-Qualifying Activities:
Researching potential properties
Reviewing financials
Passive property ownership
If both the 7-day rule and material participation tests are met, STR tax deductions may be able to be used to offset W-2 or business income.
Key Tax Deductions: Depreciation & Bonus Depreciation
One of the most significant tax benefits of STRs is depreciation, which allows property owners to deduct the cost of their asset over time.
While the depreciation is typically captured over 39 years, investors can leverage a cost segregation study to accelerate the deductions and claim a substantial portion of their STR’s value upfront.
Bonus Depreciation
Bonus depreciation allows investors to deduct a large portion of the depreciation upfront. (40% of certain property costs in 2025). This is set to decline in subsequent years but is consistently a topic of discussion with the hopes being it will be back to 100% like in previous years.
Example:
STR purchase price: $500,000
Cost segregation study identifies $120,000 eligible for bonus depreciation
Deductible amount in 2025: $48,000 (40% of $120,000)
Personal Use Considerations
If you use any personal days at all, you begin to limit your ability to take deductions as your expenses will need to be allocated between rental and personal use.
The IRS defines personal use as:
Days you or a family member use the property
Days at your property that are donated
Swapping days with another short-term rental investor
Days you rent the property to anyone at less than a fair rental price
If you use your property for more than the greater of 14 days or 10% of the number of days that your property was rented, you can only take deductions to the extent of your rental income (i.e. can’t create an overall loss). This is a bad result if you intended to maximize the tax benefits!
To maximize tax savings, track rental and personal use days carefully and ensure compliance with IRS guidelines.
Common Mistakes That Could Cost Thousands
Many investors miss out on substantial tax savings due to errors in structuring their STR operations. Avoid these common pitfalls:
Not Tracking Work Hours – Maintain a detailed log of all STR-related activities.
Hiring a Full-Time Property Manager – If a property manager works more hours than you, you may fail the material participation test.
Skipping a Cost Segregation Study – Without this study, you may forfeit significant depreciation deductions.
Allowing Guest Stays to Exceed Seven Days – Keeping the average booking length below this threshold is critical to maintaining STR tax benefits.
Excessive Personal Use – Ensure that personal use does not exceed IRS limits to maintain full deductibility of expenses.
Is the STR Loophole Right For You?
If you are an investor seeking to:
Use rental losses to offset W-2, 1099, or business income
Scale an STR portfolio more efficiently with tax savings
Final Thoughts: Maximize Your STR Tax Savings with Expert Guidance
Navigating the complexities of real estate taxation requires specialized expertise. Schedule a Free Consultation to learn more about how we can help you develop a tax plan tailored to your STR business and financial goals.
