Computing Average Guest Stay

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

Computing the average nights per guest seems straightforward on its face, right? It is likely you received enough math lessons over the years to safely and accurately take a series of numbers and find the average. Let’s talk about the stuff they didn’t teach you in the third grade.

Average Computed Within the Taxable Year

Let’s refresh ourselves with Treasury Regulations Section 1.469-1T(e)(3)(ii)(A) which reads in part-

(3) Rental activity—(i) In general. Except as otherwise provided in this paragraph (e)(3), an activity is a rental activity for a taxable year if—

(A) During such taxable year, tangible property held in connection with the activity is used by customers or held for use by customers; and

(B) The gross income attributable to the conduct of the activity during such taxable year represents (or, in the case of an activity in which property is held for use by customers, the expected gross income from the conduct of the activity will represent) amounts paid or to be paid principally for the use of such tangible property (without regard to whether the use of the property by customers is pursuant to a lease or pursuant to a service contract or other arrangement that is not denominated a lease).

(ii) Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year—

(A) The average period of customer use for such property is seven days or less;

Four mentions of “taxable year” in five sentences. The IRS must think it is important. What does this mean for you? If you launch a short-term rental in late December, and plan on leveraging the short-term rental loophole with your big cost segregation study against your high W-2 income, you better spend a few bucks on advertising and perhaps offer some reasonable discounts or incentives to get two distinct stays that can compute an average guest stay.

Average Guest Stay When Spanning Two Tax Years

What happens when you have a guest stay that starts in 2024 and ends in 2025? Specifically, you have a guest that stays from December 29, 2024 through January 3, 2025. How do you count that? Split it up? Apply it to 2024? 2025?

Let’s go to the code! Yay, right? Come on… yay, right? We thought so. Treasury Regulations Section 1.469-1(e)(3)(iii)(C) which reads in part-

(C) Average period of customer use for class of property. In determining an activity’s average period of customer use for a taxable year, the average period of customer use for a class of property held in connection with an activity is determined by dividing—

(1) The aggregate number of days in all periods of customer use for property in the class (taking into account only periods that end during the taxable year or that include the last day of the taxable year); by

(2) The number of those periods of customer use.

The key phrase is “or that include the last day of the taxable year.” This suggests that if a period of use starts before the last day of the taxable year (December 31 for most taxpayers), then the entire period is included in that year. As such, a December 29, 2024 through January 3, 2025 guest stay which is a 5-night stay counted as a 2024 stay for average period of customer use calculations.

Sidebar: The hospitality industry considers a 5-night stay as 5 days. The terminology above references “aggregate number of days” but the IRS including hospitality and accounting industries, count a 5-night stay as 5 days, which is to everyone’s benefit.

Average Guest Stay When Converting to Short-Term Rental

This one can be a zinger. If converting to or from a short-term rental, you must consider all stays for the taxable year. As such, if you convert a ski condo on May 1 into a long-term rental, you will likely exceed the average guest stay of 7 days.

What can you do? More code, please. Treasury Regulations 1.469-4(c)(2) reads-

(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).

Why is this important to you? If you can demonstrate that a long-term rental and a short-term rental are different economic units, then you can isolate each, and compute an average guest stay for each. You will need crazy good recordkeeping to show clear distinction between the activities otherwise they will default to being one activity, and your average guest stay blows up. Use different management companies. Use different platforms. Use different advertising channels.

Gaming The Average Guest Stay System

It is December 25, and you are freaking out because you need two guest stays. You find someone who wants to stay December 25 through January 4. Knowing what you know, you suggest they stay December 25 through 26, and again December through January 4. Brilliant! You suddenly have two guest stays, right?

Yeah, no. They saw you coming a mile away. Treasury Regulations 1.469-1T(e)(3)(iii)(D) read-

(D) Period of customer use. Each period during which a customer has a continuous or recurring right to use an item of property held in connection with the activity (without regard to whether the customer uses the property for the entire period or whether the right to use the property is pursuant to a single agreement or to renewals thereof) is treated for purposes of this paragraph (e)(3)(iii) as a separate period of customer use. The duration of a period of customer use that includes the last day of a taxable year may be determined on the basis of reasonable estimates.

The key point here is right to use, not actual occupancy. In our example, the right to use was from December 25 through January 4, and it was uninterrupted. This is considered one stay regardless if there are separate agreements or bookings. It looks especially bad if this was pre-arranged. Bummer.