Short-Term Rental Loophole Frequently Asked Questions

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

Here are some FAQs you might find helpful as a chapter summary to the STR loophole-

Short-Term Rental Loophole Frequently Asked Questions
Here are some FAQs you might find helpful as a chapter summary-

What qualifies a property as a short-term rental (STR)?
If the average guest stay is 30 days or fewer, the property is classified as a short-term rental.

What is the “STR loophole”?
If the average guest stay is 7 days or fewer and you materially participate, your rental losses may be fully deductible—even without real estate professional status (REPS).

Is REPS required for short-term rental deductions?
No. STRs are not considered rental activity under IRS rules, so REPS is not needed to deduct losses. Yes, we answered this question twice.

What if my STR stay averages 8–30 days?
It’s still classified as a short-term rental, treated as non-residential property. Without REPS, you might still have some tax benefits with qualified improvement property (QIP) and Section 179 expensing.

What happens if I provide hotel-like personal services?
The rental becomes a traditional business activity. It’s no longer a rental activity and may trigger self-employment tax.

What are considered personal services?
Daily cleaning, breakfast, fitness/spa access, concierge, tours, or other services not customarily provided by landlords (but rather by hotels or lodges).

Does personal service classification override guest stay duration?
Yes. If personal services are provided, average guest stay doesn’t matter—it’s a business.

Do STRs qualify for bonus depreciation?
All rentals qualify for bonus depreciation. Whether you can benefit from the deduction is the question. Short-term rentals with the loophole benefit the most.

Are STRs residential or non-residential property?
They are typically non-residential, meaning they depreciate over 39.0 years instead of 27.5 years.

What is the significance of the 7-day rule?
Averaging 7 days or less per guest opens the door to the STR loophole and non-passive loss deductions without REPS.

What does “material participation” mean in STRs?
You must be regularly, continuously, and substantially involved in operations—meeting one of the IRS’s seven tests.

Can I combine hours with my spouse to meet STR material participation?
Yes. Spouses’ time can be combined for material participation—but not for REPS qualification.

What’s the most common test STR owners meet?
The “100 hours and more than anyone else” test is often the most practical and achievable.

Do I owe self-employment tax on STR income?
Not unless you provide personal services that reclassify the rental activity as a business, and you have net rental profits.

How can I prove material participation in an STR?
Track time spent, keep emails, bookings, receipts, travel logs, and any interactions with guests or managers.

Do property managers disqualify me from STR participation?
Not necessarily, but if they spend more time than you, it could disqualify your STR loophole hopes using the 100 hours and more than anyone else test.

Are STRs subject to local lodging or occupancy taxes?
Often yes. Many jurisdictions apply hotel tax rules to STRs, even if the IRS classifies them differently.

Can I use STR losses against my W-2 income?
Yes—if you meet the STR loophole and material participation criteria, losses are non-passive and deductible which might be why you are reading this in the first place.

How does depreciation work for STRs?
STRs are generally non-residential and depreciate over 39.0 years, not the 27.5 used for long-term rentals.

Can I do cost segregation on an STR?
Yes. STRs are excellent candidates for cost segregation when they qualify as active businesses (hotel like) or non-passive activities (short-term rental loophole).

Can I have both STR and long-term rentals in the same partnership LLC?
Yes, but it complicates tax reporting. STRs and long-term rentals follow different depreciation and passive activity rules.

What happens to STR deductions if I use the property personally?
You create a recordkeeping mess for you and your tax professional, and your rental activity might have limitations in terms of deductions.

Is Airbnb considered STR activity?
Yes. Airbnb and similar platforms typically involve short stays and fall within STR classification if other conditions are met.

How do I calculate average guest stay?
Divide total rental days by the number of guest bookings (not calendar days). Only rented days count—not vacant or personal use days.

How does converting from LTR to STR impact my average guest stay?
This can be problematic unless you can demonstrate that each activity is a separate economic unit and therefore separate rental activities.

How can I separate long-term and short-term rentals for average stay purposes?
Use distinct advertising channels, management, and recordkeeping to demonstrate they are separate economic units. If successful, you can compute average guest stay independently for each.

What if a guest stay spans two tax years—how is it counted?
If a stay includes December 31, the entire stay is counted in that tax year for computing average stay. A December 29–January 3 booking counts as a 5-day stay in the current year.

Can I reset the average guest stay by splitting one long booking into two?
No. The IRS counts the entire right to use period, if uninterrupted, as a single stay—even if you try to artificially break it into two bookings. Pre-arranged splits are disregarded.

What is “reasonable gross rent” and how is it evaluated?
It’s the idea that your reported rental income should align with market expectations. Tools like AirDNA or market comps are used to compare your earnings against similar STRs in the area. If your income is far below comparable properties, it raises concerns about reporting accuracy or business intent including profit motive.

Can I still deduct losses if my STR consistently underperforms?
Yes, but only if you can demonstrate a legitimate effort to operate at a profit including advertising, rate optimization, and strong documentation. If losses persist without a clear plan to improve, the IRS might view it as a personal use property or hobby, disallowing deductions. Yuck.