Cannot Group Short-Term Rentals With Other Rentals

By Jason Watson, CPA
Posted Monday, July 7, 2025

This section is partly a repeat of another section from Chapter 5 on Material Participation Rules where we discussed grouping rentals to make meeting material participation thresholds easier.

Why Group Short-Term Rentals

You might have multiple short-term rental properties whose average guest stays are 7 days or less, cool, but you struggle to meet the material participation thresholds on each rental activity separately. To reiterate, the three most popular material participation tests for rental property owners are-

• 500 hours, or
• 100 hours and more than anyone else, or
• Substantially all hours

The regulations allow you to group your short-term rentals together to be considered one activity. Specifically, you might not be able to meet the above tests for each rental property, but collectively you can.

Short-Term Rental Grouping

To clear up some possible confusion, there are two grouping elections that we discussed earlier-

• Treasury Regulations 1.469-9(g) which is exclusively used for real estate professional status (REPS) or technically a “qualifying taxpayer.”
• Treasury Regulations 1.469-4 which is a general grouping provision, and we discuss more about it below, and how it relates to the short-term rental loophole.

Generally, those activities that are similar can be considered an appropriate economic unit. Treasury Regulations 1.469-4(c) read-

(2) Facts and circumstances test. Except as otherwise provided in this section, whether activities constitute an appropriate economic unit and, therefore, may be treated as a single activity depends upon all the relevant facts and circumstances. A taxpayer may use any reasonable method of applying the relevant facts and circumstances in grouping activities. The factors listed below, not all of which are necessary for a taxpayer to treat more than one activity as a single activity, are given the greatest weight in determining whether activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469—

(i) Similarities and differences in types of trades or businesses;

(ii) The extent of common control;

(iii) The extent of common ownership;

(iv) Geographical location; and

(v) Interdependencies between or among the activities (for example, the extent to which the activities purchase or sell goods between or among themselves, involve products or services that are normally provided together, have the same customers, have the same employees, or are accounted for with a single set of books and records).

Let’s bring in a summary table to help navigate this madness-

Non-Rental Activity

Recall that if the average guest stay is 7 days or less then it is not considered a rental activity but rather a business per Treasury Regulations 1.469-1T(e)(3)(ii). This also includes those rentals where you provide substantial personal services. Both examples are depicted in the table above.

Sidebar: For any business activity, not just rental property activities, to be deductible against other types of income. It requires material participation. As such, you could have a non-rental activity that remains limited for deducting losses since it is considered passive.

What does this mean to you? Why should you care? To minimize the risk of your grouping election being challenged and then denied by the IRS, you should only group short-rental rental properties with average guest stays of 7 days or less together, and free of other rentals (except bed and breakfast arrangements, hotels, hunting lodges, etc.). Why? You want to maintain the integrity of the appropriate economic unit.

What about 30-day rentals? They are considered short-term too, right? While 30-day rentals are considered short-term, they cannot be considered a non-rental activity unless personal services are provided (see fourth example in the above table). Therefore, these types of short-term rentals (average guest stay between 8 and 30 days) should be kept separate.

Could your group your bed and breakfast with your short-term rental as we mentioned above? Yes, and it is not a bad idea. Keep in mind that a bed and breakfast is considered a hotel since substantial personal services are provided. As such, this is not a rental activity. A short-term rental with an average guest stay of 7 days or less is also not a rental activity (it is a business). Therefore, these two activities may be grouped into one activity to assist with material participation hurdles.

Caution! Before you blast off with your 1.469-4 election, a quick reminder is in order that the regulations require the grouping to be an appropriate economic unit. As such, they must share common control or management, must be similar in nature and should be geographically similar (although geography is less important given our remote work mindset).

Here is yet another table to visualize grouping elections-

As a reminder, the 1.469-9(g) which you might recognize or be familiar with is for real estate professionals, and is not the same as the election you would use for short-term rentals.

There’s more! Yet another reminder, the 1.469-9(g) election for real estate professional status (REPS) is all or nothing. This means that all rental activities must be grouped together if you choose to group any. To recast the table above, all rental activities except those with average guest stay of 7 days or less or those where substantial personal services are provided would be grouped together if leveraging Treasury Regulations 1.469-9(g) for real estate professional status.

Here is another way to look at the intersection of the 1.469-9(g) and 1.469-4 elections- the 1.469-9(g) election can only include rental activities. Therefore, it automatically excludes non-rental activities such as short-term rental activities qualifying for the loophole.

1.469-4 Election Concerns

The 1.469-4 grouping election is made with the tax return, and is straightforward. Similar to the 1.469-9(g) election, the 1.469-4 election endures year after year unless a material change in facts and circumstances occurs. This might include selling a rental property, converting one from short-term to long-term or changing how they are managed, among other things.

Recall the geographic requirement under Treasury Regulations 1.469-4(c)(2)(iv) above. If your short-term rentals are scattered, it might be harder to defend the appropriate economic unit concept and group them together. This in itself is not a complete deal breaker given our remote work nature we live in today, but you should be aware and attempt to buttress other areas of the grouping election parameters.

Sidebar: When these regulations were written, working and managing things from a distance were not well contemplated. The geographical provision was meant more as a barometer of your ability to manage the grouped activity as one versus a strict rule on geography itself.

Tracking Time Under The 1.469-4 Election

You should still track time on a per-rental basis to ensure a property manager or a cleaner, for example, is not spending more time than you. In other words, it is easy to get comfortable with your participation in a couple of properties and neglect the time spent by others on the ones you are not managing or working on directly.

Additionally, and as mentioned elsewhere, you must track other people’s time when using the 100 hours and more than anyone else material participation test.