My Business Rents My Short-Term Rental

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

What if your business has a legitimate business purpose to rent your short-term rental? A different spin on the Augusta rule if you will. There are some questions to be asked and answered with this one. First, why? Second, what are some examples of legitimate business purposes?

Why Would You Have Your Business Rent Your Short-Term Rental

You might need a place for your business to conduct an off-campus meeting or retreat, and why bother with a hotel? Perhaps your short-term rental is in a really great place for a business meeting or has better amenities such as a kitchen including dining room tables and larger televisions. It might simply be cheaper than conference space at a hotel.

Those are the soft reasons. Let’s talk about the tax benefits and some other goodies.

First, let’s tackle the self-rental problem or what people at times will call the self-rental trap. Yes, we can get around this with a Treasury Regulations 1.469-4 grouping election, but you would not want to do this for a board meeting or business retreat- the grouping election is more appropriate for the office building you own personally and lease back to your business (the election itself has some requirements between the two activities).

Back to the self-rental trap. Treasury Regulations Section 1.469-2 boringly reads-

(f)(6) Property rented to a non-passive activity. An amount of the taxpayer’s gross rental activity income for the taxable year from an item of property equal to the net rental activity income for the year from that item of property is treated as not from a passive activity if the property-

(i) Is rented for use in a trade or business activity (within the meaning of paragraph (e)(2) of this section) in which the taxpayer materially participates (within the meaning of Section 1.469-5T) for the taxable year; and

(ii) Is not described in Section 1.469-2T(f)(5).

Read that first paragraph again. The phrase “treated as not from a passive activity” tends to stand out. This essentially means you cannot use a self-rental to generate a bunch of passive income to offset your otherwise non-deductible passive losses.

The self-rental trap is the asymmetrical handling of taxable rental income versus losses. Rental income or profits are considered nonpassive and cannot offset passive losses from other activities such as rentals. However, rental losses from self-rental arrangements remain passive and are subject to passive activity loss limitations.

With that in mind, consider that the rent paid from the business to the short-term rental is a tax deduction to the business, and in turn lowers your taxable income from the business. If this business is not taxed as an S corporation and is reported on Schedule C of your individual tax return (Form 1040), this also reduces your self-employment taxes (S Corp profits are not subject to self-employment taxes).

Now we need to pay just a bit more attention because here’s where it gets nuanced. If your short-term rental property qualifies for the loophole, the tax benefits are minimal. Your business has a tax deduction, your rental property has more rental income and losses are reduced- however, you were able to deduct those rental losses against your business income anyway, so the net-net is zero.

But! What if your STR did not qualify for the loophole. Average guest stay was 21 days or something, or you didn’t materially participate? Further, let’s say your rental had a loss of $20,000. Assuming your modified adjusted gross income is above $150,000, those losses would be disallowed and carried over into future years. Yuck, right?

But along comes your business renting the short-term rental for $12,000 for a week to conduct bona fide business activities. This $12,000 lowers business profits which impacts you immediately and your STR losses are now reduced to $8,000 and carried over on Form 8582. This is a $12,000 tax arbitrage.

Not all that glitters is gold- there are some Section 199A qualified business income deduction considerations. What is your marginal tax bracket? Are you already phased out? Are you an SSTB (specified service trade or business)? Some tax planning is needed for sure, but at worst, a $12,000 reduction in business income only “costs” you $12,000 x 37% x 20% or $888.

You could also use your business to carefully and reasonably reduce your average guest stay or to help in bringing in another data point to compute an average. Careful. Reasonable. No self-dealing. Legitimate business purposes. You get it, right? Pigs get fed and hogs get slaughtered.

Legitimate Business Purposes To Rent The Short-Term Rental

Some of this gets a bit silly with a one-person small business, but if you have your spouse and children on payroll, or even some senior employees, then business purposes seem to be more real (or at least you feel like you can blink when talking to the IRS). Here is a quick list of the activities your business could conduct in a legitimate or bona fide way-

• Board of Directors / Shareholder Meetings (but a board of 1 is dumb)
• Strategic Planning / Vision Retreats
• Employee Training / Continuing Education
• Client / Investor Meetings
• Team-Building
• Work Sessions / Project Sprints (swim lanes in your STR pool? Maybe)

Here are some agenda items to kick around as well-

• Review prior year financial statements including forecasts
• Tax planning for the business and owners
• Discuss marketing plan
• Analyze KPIs, operational metrics and goals for the same
• Determine staffing needs and hiring plans including training improvements
• Review IT needs including vendor renewal and risk assessment (backup, cybersecurity)
• Assess insurance coverage
• Analyze regulatory compliance
• Review other vendor contracts
• Provide technical subject matter training
• Consider succession planning and key person risk assessment

Pitfalls To All This Business Rents The STR Gibberish

Here are three important considerations for your pitfall avoidance-

• Ensure you have a rental agreement, and that the money actually moves. Your business checking account should show payment to your rental property checking account just like a real customer doing a real transaction. Seriously, backdating stuff will not hold unless you can point to a transaction. Do it, but do it right which is doing it in real-time.
• Be reasonable on rent- it should align with your published rental rates and be consistent with alternative short-term rentals, hotels, conference room space, etc. Record these comparables in case you need to present them later.
• Document the heck out of your business purpose, agenda and meeting minutes. Read this again, please.

For those who also use the Augusta rule where you can rent your personal residence to your business for 14 days for legitimate business purposes that are ordinary and necessary, and not recognize the rental income for tax purposes (yet your business receives a tax deduction), the pitfalls above apply to you as well. In Sinopoli v. Commissioner, Tax Court Memo 2023-105, the tax court said these three things-

• “Petitioners have not presented any written documentation such as minutes, agendas, or calendars showing that all the claimed meetings occurred during the years at issue…”
• “We find that petitioners’ testimony was not credible as to the frequency of meetings during the years at issue. Their testimony was inconsistent and included testimony that petitioners did not recall the number of meetings that took place.”
• “Petitioners did not obtain an appraisal of the rental value of their residences as meeting space.”

Yikes! This tax court case was purely an Augusta rule matter, but the same can be applied to your business when renting your short-term rental for business purposes.

Can I Rent My Short-Term Rental

We often get asked, “if I pay market rent, why can’t I rent my short-term rental like any other guest?” The primary reason behind this is to avoid the vacation home rules. As a refresher, if you use your rental property more than 14 days or 10% of the rented days, whichever is higher, then you trigger vacation home rules and losses are limited.

Sidebar: Under IRC Section 280A(d)(2), you cannot rent to family members either. The same vacation home rules apply, and their days will count against your personal use days even if they pay fair market value rent. However, if they use the rental property as their primary residence and pay fair market rent, then family members are treated like any other tenant.

You cannot simply create a business out of thin air in an attempt to leverage the “business rents my STR” concept either. The business must be a business where your involvement is regular and continuous with a profit motive. In other words, it must have a purpose with commercial substance.