Short-Term Rental Loophole Frequently Asked Questions

By Jason Watson, CPA
Posted Tuesday, September 23, 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 substantial 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 substantial 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 nonpassive 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 nonpassive 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 nonpassive 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.

Can I group my short-term rentals with long-term rentals for tax purposes?
No. You cannot group short-term rentals (average guest stay of 7 days or less) with other rental properties such as long-term rentals or short-term rentals with average stays of 8–30 days. Doing so might invalidate your grouping election with the IRS.

Why would I want to group short-term rentals together?
Grouping helps you meet material participation thresholds (e.g., 500 hours, 100 hours and more than anyone else, or substantially all hours) across all properties combined, rather than on each property individually.

Which tax regulation allows grouping of short-term rentals?
Treasury Regulation 1.469-4 allows grouping of short-term rentals (non-rental activities) into a single business activity if they meet the appropriate economic unit criteria.

What criteria determine an “appropriate economic unit” under Treasury Regulation 1.469-4?
The IRS looks at factors like: similarities in type of business, common ownership and control, geographical location and interdependencies between activities. You don’t need to meet all factors, but a reasonable method should justify the grouping.

Are short-term rentals considered rental activities?
No, if the average guest stay is 7 days or less or substantial personal services are provided, it’s not considered a rental activity but a business activity under Treasury Regulations 1.469-1T(e)(3)(ii).

Can I group my short-term rental with a bed and breakfast?
Yes. A bed and breakfast (which provides substantial personal services) is also considered a non-rental business activity, so it can be grouped with short-term rentals using the 1.469-4 election.

Can I use the 1.469-9(g) election for short-term rentals?
No. Treasury Regulation 1.469-9(g) is only for real estate professionals and applies only to rental activities—not short-term rentals with average stays of 7 days or less.

What happens if my short-term rentals are in different geographic locations?
Geographic similarity helps support the grouping as an appropriate economic unit, but it’s not a strict requirement. Remote management is more accepted now, but you’ll need to strengthen other aspects of the grouping to defend it.

What qualifies a basement, garage, or ADU as a dwelling unit for short-term rental purposes?
A dwelling unit must have sleeping space, a toilet, and cooking facilities; optional features like a separate entrance or utilities help but aren’t required.

What if a bedroom has a separate entrance and en suite bathroom—does that help?
Yes, adding features like a separate entrance, bathroom, and even a hot plate and mini fridge gets closer to meeting the IRS dwelling unit definition. Watch out for form over substance, and overall reasonableness.

How does a cost segregation study work for a converted basement or garage?
You’ll need to calculate a business use percentage, usually by square footage, and account for shared systems like plumbing and HVAC when allocating costs.

How does cost segregation differ for an ADU compared to a converted basement?
An ADU is treated as a separate structure just like a mini standalone rental property, making cost segregation simpler, while basements and attics require business use allocations.

Does converting part of my home into an STR affect capital gains exclusion?
Yes, IRS rules state you generally can’t exclude gain on a portion of your property used for rental activities (generation of income), which can reduce your available exclusion when selling. Yuck.

What happens to Section 179 deductions if I convert my short-term rental into a second home?
Section 179 expensing is recaptured as ordinary income once the rental property is no longer used predominantly for business, turning last year’s big deduction into taxable income. Yuck.

Do I have to recapture bonus depreciation when my STR becomes a second home?
Bonus depreciation taken on your IRC Section 1245 property generally isn’t recaptured at conversion unless the asset is listed property; instead, it carries forward and is recaptured later at sale. Property identified in a cost segregation study is not listed property, so this is rarely a concern.

Why would my business rent my short-term rental?
Your business might use your property for off-campus meetings, retreats, training sessions, or client gatherings where the amenities and costs are more attractive than hotels or conference centers.

What is the self-rental trap?
The self-rental trap occurs when rental income from leasing your rental property to your own business is treated as nonpassive and the rental income (profits) cannot offset other passive losses. Nonpassive losses from a self-rental are the apples to the oranges of typical rental activities that are passive.

When considering renting my STR to my business, what are examples of legitimate business purposes?
Legitimate purposes include board or shareholder meetings, strategic retreats, employee training, client or investor meetings, team-building, or focused work sessions like project sprints.

What tax benefits can result from my business renting my STR?
Very little if your STR already qualifies for the short-term rental loophole. However, if your rental does not qualify (average guest stay exceeds 7 days or you cannot show material participation), then rental income to the STR is a tax deduction for the business and the otherwise non-deductible rental losses are reduced. A tax deduction shift in a sense.

What pitfalls should I avoid when my business rents my short-term rental?
Key pitfalls include failing to move real money between accounts, charging unreasonable rent, or not documenting agendas, minutes, and business purposes thoroughly.

Can I rent my short-term rental to myself or family if I pay market rent?
Generally no, because vacation home rules apply if personal use exceeds 14 days or 10% of rental days, and family use counts as personal use unless they pay fair market rent and use it as a primary residence.

Should I set up a separate LLC for renting recreational equipment alongside my rental property?
A separate LLC or another business entity is not required but can provide risk compartmentalization and peace of mind, especially if recreational equipment is rented under a separate lease.

Do I report recreational equipment rentals on Schedule C or Schedule E?
If equipment is offered only to rental guests as an incidental amenity, report on Schedule E or Form 8825; if you rent to the general public with continuity and profit motive, report on Schedule C or Form 1065.

Can I use Schedule 1 Line 8l to report recreational equipment rental income?
Yes, but it is rarely used since expenses and depreciation are not easily matched; it is better suited for one-off rentals, such as lending an RV once.

How does grouping recreational equipment rental with my rental property affect taxes?
Grouping under Treasury Regulations 1.469-4 allows both activities to be treated as one economic unit, supporting material participation and enabling losses and taxable income to be netted together.

What is the benefit of combining the activities without a formal grouping election?
You can report recreational equipment as part of the overall rental property on one Schedule E entry, simplifying accounting and clearly showing it as one activity.

What risks come with combining property and equipment rentals into one activity?
If your rental no longer qualifies for the short-term rental loophole, losses (including from equipment) may be disallowed and carried forward; also, liability risks may prompt your insurer or attorney to recommend separate entities.

How do I decide where to report recreational equipment rentals in practice?
If tied to the rental property, use Schedule E or Form 8825 in a partnership environment; if run as a separate business open to the public, use Schedule C or Form 1065; for one-time rentals not tied to your property, use Schedule 1 Line 8l.