Guide · Short-term rental tax strategy
How a short-term rental can offset your salary.
Rental losses normally can’t touch W-2 income. A short-term rental you run yourself is the exception. Three conditions, one study, and a year of logged hours. Here is the whole mechanism, including the parts that trip people up.
Updated October 2026. Not tax advice; bring it to your CPA.
Why it works
Rentals are “passive” by definition, and passive losses only offset passive income. But the rule that makes rentals passive has an exception: if the average guest stays 7 days or less, the activity isn’t a rental activity. It’s a business. And a business you materially participate in is non-passive, so its losses offset everything else.
Treasury Regulation 1.469-1T(e)(3). The material participation tests are in 1.469-5T. The personal-use limit is Section 280A.
The three conditions
All three, every year you claim a loss.
Average stay of 7 days or less
Add up the nights booked across the year and divide by the number of stays. Seven or fewer and the IRS doesn't treat it as a rental activity at all, which is what takes it out of the passive-loss rules. (Thirty days or less also works if you provide hotel-style services, but that's a different business.)
You materially participate
You have to be the one running it. The three tests people actually use: more than 500 hours in the year; or more than 100 hours and more than anyone else, including your cleaner and your co-host; or substantially all of the work yourself. Year one is where the hours matter most, because that's where the big deduction lands.
You keep your personal use small
Use it yourself for more than 14 nights, or more than 10% of the nights it's rented, whichever is greater, and it becomes a residence in the tax code's eyes. Losses get capped. Family weekends count. Plan them.
Where the deduction comes from
The three conditions unlock the loss. Cost segregation creates it.
Without a study, a furnished rental depreciates slowly: the whole purchase price over 27.5 years. The loss in year one is small, and the strategy barely moves the needle.
A cost segregation study breaks the property into parts. On a furnished short-term rental, the furniture, fixtures, appliances, finishes, pool, hot tub, decks and landscaping often come to 30–45% of the basis, all of it 5- or 15-year property.
With 100% bonus depreciation back for property acquired after January 19, 2025, that entire share is deductible in year one. That is the number that offsets your salary.
Our Sonoma case: a $2.61M short-term rental where the study moved $1.14M into short-life property. See it on the cost segregation page.
Start to finish
Five steps, in the order that matters.
Buy a property that can legally be an STR
Most places restrict short-term rentals or cap them. The strategy is dead on arrival if the permit isn't available. Check before you offer, not after you close.
Run a cost segregation study
The study identifies the 5- and 15-year property: furniture, fixtures, finishes, the pool, the deck, the landscaping. On a furnished short-term rental that share is high.
Take 100% bonus on it
For property acquired after January 19, 2025, every dollar in those short-life classes is deductible in year one. On a $1.5M property that's commonly $300,000 to $500,000.
Log the hours, every week
Guest messages, pricing, listings, restocking, coordinating cleaners, repairs, drives to the property. A contemporaneous log is what survives an audit. We keep one with every client.
File it as non-passive
The loss offsets your other income on that year's return: salary, bonus, RSUs, business income. Your CPA needs the study, the stay data and the hour log.
Step one is where most people go wrong, and it’s the reason STR Prime starts with the permit and the underwriting before anyone looks at a house.
Who it fits
High income, a demanding job, and a weekend a month to give it.
- It fits households with large W-2 or similar income, a property budget that supports a real short-term rental, and the willingness to actually run it for a year. Physicians, tech employees with vesting stock, executives and founders are the usual profile. The high-income guide →
- It doesn’t fit anyone who wants a fully passive investment from day one, who plans to use the house most weekends, or who is buying somewhere short-term rentals aren’t permitted. The tax benefit doesn’t rescue a bad property.
- Already own one? If you’ve been running it and haven’t done a study, a look-back study catches up the missed depreciation on this year’s return. Start with the estimate.
Questions
Do I need real estate professional status?
No. That's the other route to the same result, and it requires 750 hours a year in real estate and more time there than in your job. The short-term rental route doesn't. That's why it fits people with a demanding W-2.
Can a property manager run it for me?
Not in year one if you want the deduction. If a manager does more hours than you, you fail the test. The workable model is co-management: you do the guest-facing and decision work and log it; a team handles cleaning and maintenance under your direction. From year two, once the big deduction has been taken, you can hand it off. That's exactly how Realm Management structures year one.
What if I hit the 100 hours but my cleaner did more?
Then you don't pass that test. Hours by anyone you pay count against you in the 'more than anyone else' comparison. Either do more yourself, or pass the 500-hour test instead. Track everyone's hours, not just yours.
What happens in year two and after?
The property should show taxable income once the big depreciation is behind it, and that income is sheltered by the remaining depreciation. You still need to materially participate in any year you want to claim a loss. When you sell, depreciation is recaptured; a 1031 exchange can defer it.
Is this the 'Airbnb loophole' people talk about online?
Yes. It isn't a loophole in the sense of a trick. It's how the passive-activity rules have been written since 1988. The reason it gets that name is that most people don't meet all three conditions, and most agents and managers don't know them.
What does it cost to do this properly?
A cost segregation study runs a few thousand dollars and comes with a free estimate first, so you see the deduction next to the fee. Beyond that, the cost is your time in year one and a CPA who has done this before. We keep a short list of those.
Find out whether the strategy applies to you before you fall for a house.
Five questions and a call. If it doesn’t fit your income, your timeline or your tolerance for guests, we’ll say so.