Short-Term Rental Loophole: How to Use STRs for Tax Savings

The short-term rental (STR) loophole allows real estate investors to claim active income treatment, bypassing the passive activity loss (PAL) rules that typically limit rental loss deductions. This can lead to significant tax savings.

How the STR Loophole Works

Not Subject to Passive Loss Rules – Unlike traditional rentals, STRs can avoid passive classification if they meet material participation tests under Treasury Reg. §1.469-5T.

No Real Estate Professional Status (REPS) Required – Unlike long-term rentals, owners don’t need REPS to deduct losses against active income.

Rental Days Matter – The IRS defines STRs as properties rented for 7 days or less per stay on average or where substantial services (e.g., cleaning, concierge) are provided.

Qualifying for Material Participation

To use this strategy, an STR owner must meet one of the IRS material participation tests, such as:

500+ hours of personal involvement in the rental.

100+ hours, with no one else spending more.

Substantial participation across multiple properties.

Tax Benefits of the Loophole

Immediate Deduction of Rental Losses – Active STR losses can offset W-2, business, or other active income.

Bonus Depreciation – Can accelerate write-offs of furniture, appliances, and renovations.

Cost Segregation Study – Allows classification of certain property components for faster depreciation.

Potential Risks & Compliance

The IRS scrutinizes material participation claims. Keeping detailed records (time logs, expense tracking) is crucial.

Local Regulations – Some areas restrict STR operations or impose additional tax and licensing requirements.

How AJB & Associates CPAs Can Help

At AJB & Associates CPAs, we help investors maximize tax savings with strategic short-term rental tax planning. Visit ajbcpas.net to learn more.