Short-term rental (STR) tax loophole

Under Reg. 1.469-1T(e)(3)(ii)(A), rental activities with an average guest stay of 7 days or less are not "rental activities" under IRC Section 469's passive activity rules. This is the famous "STR loophole."

How it works

For a regular long-term rental, even if you spend 1,000 hours a year managing it, losses are passive (unless you qualify as a REPS). For an Airbnb / VRBO / similar with average stay ≤ 7 days, the property is treated as a trade or business for activity-classification purposes.

If you also materially participate, the losses become non-passive — meaning they can offset your W-2 or business income without REPS qualification.

Material participation tests

The 7 material-participation tests are in Reg. 1.469-5T. The most common ones for STR owners:

• 500-hour test: you participated 500+ hours in the activity during the year
• 100-hour test + most-active: you participated 100+ hours and more than anyone else (including the property manager)
• Substantially all: substantially all of the participation in the activity was you

Most STR owners satisfy the second test — 100+ hours and you're more active than your cleaner and PM combined.

Combine with cost segregation

The STR loophole alone gives access to losses; cost segregation supercharges the losses. The combination — STR + cost seg + bonus depreciation + material participation — is what creates the "buy a beach house, write off $80K against your W-2" headlines.

What "7 days" actually means

Average rental period is total days rented divided by number of rentals. So 12 one-week rentals (84 days at 12 rentals = average 7 days) qualifies. 6 two-week rentals does NOT.