Short-Term Rental Loophole Summary

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

Here is a recap of what we just discussed in this fun chapter on the short-term rental (STR) loophole-

• Short-term rentals officially have an average guest stay of 30 days or less. When this occurs, the rental is considered nonresidential which opens up additional accelerated depreciation and Section 179 expensing. However, depreciation is now 39.0 years versus 27.5 years. The activity remains passive.

• Short-term rentals with average guest stay of 7 days or less where you materially participate as defined by Temporary Treasury Regulations 1.1469-5T(a) changes the color of money and your rental property activity is non-passive (and not limited by passive activity loss limitations).

• You can still consider your short-term rental property with an average guest stay of 30 days or less as non-passive, and therefore not limited by passive activity loss limitations. To do this, you need to provide additional services such as daily cleanings, tours (think hunting lodge), concierge services and other hotel-like services.

• The top three material participation tests are a) 500 hours, b) substantially all the hours, and c) 100 hours and more than anyone else.

• Short-term rentals, the 7-day average stay variety, do not count towards the 750 hours test (REPS hours) for real estate professional status. Then again, you do not need to be considered a real estate professional to leverage the tax benefits of a short-term rental property.

• Reporting your rental property activities, and not just your short-term rentals, in a partnership such as multi-member LLC significantly lowers your audit rate risk and reduces your tax footprint.