Chapter 7 Introduction

By Jason Watson, CPA
Posted Sunday, May 25, 2025

Chapter 7 tackles one of the most powerful, misunderstood, and IRS-scrutinized niches in real estate tax planning. Sounds ominous, no? Unlike long-term rentals, STRs can escape the usual passive activity loss limitations if deployed correctly creating massive opportunities to offset W-2 income and other non-passive income with rental losses, especially through cost segregation and bonus depreciation. Ok, that was a long sentence.

This chapter breaks rental properties into four treatment buckets based on average guest stay and personal services provided. Rentals with stays of 0–7 days and no hotel-like services may qualify for the STR loophole with non-passive treatment. Rentals with 8–30 day stays are also considered short-term and non-residential, with some tax benefits but are generally limited. Rentals over 30 days fall under traditional passive activity rules, and any rental property with personal services such as daily housekeeping, breakfast, or concierge amenities becomes a full-blown business, subject to self-employment tax and Schedule C or business entity tax return reporting.

The core topic is how STRs are not treated as traditional rental activities under IRS rules should you materially participate with an average guest stay of 7 days or fewer, and therefore don’t require Real Estate Professional Status (REPS) to allow rental loss tax deductions (REPS is nearly impossible to achieve if the household has W-2 jobs, so STR loophole becomes sexy for certain investors).

We also discuss strategies for tracking time, handling property management, practical examples, court case references, and tax court interpretations.

This is a hot topic… here we go!