Computing Average Guest Stay

By Jason Watson, CPA
Posted Wednesday, July 15, 2026

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.

Computing Average Guest Stay Without Actual Guest Use

This one is easy, and it basically goes like this- You cannot point to your Airbnb or Vrbo listing which states “7-night maximum” or something similar and claim that your average guest stay is clearly 7 days or less. You must have actual customer use.

The regulations just quoted earlier state “the average period of customer use for such property is seven days or less.” Customer use is the focus phrase. As such, the tax court in Rogerson v. Commissioner, Tax Court Memo 2022-49, plainly stated-

Without any customer use, it is impossible to establish (as required by the regulations) the average period of customer use for the yachts. Accordingly, Mr. Rogerson fails to qualify for the first exception.

Sure, this quote is in reference to yachts, but the approach remains valid for short-term rental properties. In this case, Rogerson was trying to claim 7-day average customer use, and then he also tried to argue that if the court doesn’t accept the 7-day argument, could they accept the 30-day argument. The 7-day argument was the “first exception” as quoted above, and he also failed for the same reason on the second exception of 30-day use.

Sidebar: The word “exception” is being used in this context since rental activities are generally passive “except” in certain situations.

Sidebar #2: Rogerson was trying to use the 30-day exception where personal services are being provided. In the context of a rental property, this would be akin to a bed and breakfast, or a hunting lodge where significant personal services are being offered such as daily linen changes, concierge services, airport transportation, etc. plus an average guest stay of 30 days or fewer.

The court in Rogerson continues with this quote as well-

For purposes of these rules, a period of customer use is the period “during which a customer has a continuous or recurring right to use” the property. Treas. Reg. § 1.469-1(e)(3)(iii)(D). The average period of customer use is calculated by dividing the aggregate number of days in all periods of customer use of the property by the number of periods of customer use.

Seems straightforward, right? Practically 5th grade math.

Average Guest Stay When Spanning Two Tax Years

What happens when you have a guest stay that starts in Year 1 and ends in Year 2? Specifically, you have a guest who stays from December 29 through January 3. Assuming you are a calendar based taxpayer versus fiscal year, and 99.99% of you are, how do you count that? Split it up? Apply it to Year 1? Year 2?

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 means that if a period of customer use includes December 31 for a calendar-year taxpayer, the entire period is included in that year’s average-customer-use calculation.

As such, a December 29 through January 3 guest stay, which is a 5-night stay, is counted as a Year 1 stay because it includes the last day of the Year 1 taxable year. Because the same stay also ends during Year 2, the entire stay can also be counted in the Year 2 average-customer-use calculation. Yes, this can cause the same cross-year stay to be included in both years.

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. Nobody wants a 6-day answer here.

Average Guest Stay When Converting to Short-Term Rental

This one can be a zinger. If the STR period and the later LTR or MTR period are treated as one continuous IRC Section 469 activity, then you must consider all customer-use periods for the taxable year. In that fact pattern, converting a ski condo on May 1 into a long-term rental will likely blow up the 7-day average. However, if the facts support treating the STR operation and the later LTR operation as separate economic units, the average-customer-use calculation should be applied to the property held in connection with each separate activity.

Here’s how this works. More code, please. Treasury Regulations Section 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. Have different agreements / leases.

Why is this important to you? IRC Section 469 is activity-based, not purely parcel-based. If you can demonstrate that a long-term rental and a short-term rental are separate economic units, then you can treat them as separate activities and compute average customer use for each.

Don’t celebrate too soon! You need crazy good documentation to show a clear distinction between the activities. Otherwise, the IRS might argue that you have one activity that merely changed characteristics, and your average guest stay blows up. Use different management companies where possible. Use different platforms. Use different advertising channels. Have guest agreements for the STR and tenant leases for the LTR. Keep separate calendars, platform statements, cleaning logs, maintenance notes, management agreements, advertising records and accounting records where practical. The more the two phases look like two different operations, the better your argument.

Same property? Yes. Same activity? Not if the facts tell a different story.

Sidebar: This is not for the faint of heart, or perhaps better said, not for the lousy recordkeeper. To demonstrate true separate activities, you will need excellent documentation proving these are two separate and distinct activities. Candidly, the bar is quite high. Many of the rules in this area look at the full tax year, so splitting one property into two separate activities inside that same year is a heavy lift. Doable? Perhaps. Casual? Nope.

By leveraging the Appropriate Economic Unit test with a flip of the narrative, you are effectively arguing that a mid-year conversion is not a single, evolving activity, but rather the termination of one business and the commencement of another. Treasury Regulations Section 1.469-4(d)(1) supports this distinction by generally prohibiting the grouping of a rental activity with a trade or business activity unless one is insubstantial or another exception applies.

Since an STR with an average customer use of 7 days or less is not treated as a rental activity under IRC Section 469, it stands in a different category from a traditional long-term lease. The “taxable year” language in the average-customer-use regulation tells us the measuring period for the activity. It does not automatically answer whether the STR operation and LTR operation are one activity or two.

We mention the word “insubstantial” above, which is a direct term from the regulations. If you have an STR for 1 week and an MTR for 51 weeks, the IRS might argue that the STR is insubstantial and force the grouping. Simply put, this could be viewed as one continuous activity that changed characteristics.

Conversely, if you have three months of STR and nine months of MTR or LTR, neither phase is necessarily insubstantial. If the customers, agreements, management, platforms, services, and books and records are also meaningfully different, the argument that they are separate activities becomes much stronger. Under this position, the IRC Section 469 activity rules are applied first, and average customer use is then determined separately for the property held in connection with each activity.

Therefore, the regulations may actually require you to keep the activities separate rather than allowing you to combine them into the same bucket. This prevents the 30-day stays from being averaged in with the 7-day stays, which is exactly the separate economic unit result you are looking for. So, you could rock up to the IRS with a T-shirt that reads: “I didn’t choose to separate them; your own regulations at 1.469-4(d) prohibited me from grouping them.” A bit wordy for a T-shirt.

Ultimately, this position hinges on facts and circumstances. If the two phases are not clearly distinct and substantial, operationally, economically, and in recordkeeping, the IRS might treat them as a single activity, combine all stays, and potentially disqualify the short-term rental classification. Yeah, a bad day turned into a bad tax return.

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.

What If My Business Rents The Short-Term Rental

What if your business has a legitimate business purpose to rent your short-term rental? This would be considered a self-rental since you materially participate in both activities. You could carefully and reasonably leverage this concept to help with computing average guest stay. Check out our my business rents my short-term rental section for more information.