Why it is not passive
Normally rental losses are passive and can only offset passive income. But a short-term rental where the average guest stay is 7 days or fewer is not treated as a rental activity under the passive loss rules. If you also materially participate, the losses are non-passive and can offset W-2 or business income.
Where the big deduction comes from
Pair the non-passive treatment with a cost segregation study and bonus depreciation, and a single property can generate a large first-year paper loss. For a high earner, that loss can shelter ordinary income in the year of purchase — the core appeal of the strategy.
The two tests you must meet
First, the average stay must be 7 days or fewer (or 30 days or fewer with substantial services). Second, you must materially participate — commonly by meeting the 100-hour test where no one else works more, or the 500-hour test. Keep a contemporaneous time log; this is the most litigated point.
Frequently asked questions
Do I need to be a real estate professional?
No. That is the key difference. A short-term rental with a 7-day-or-less average stay is not a rental activity, so real estate professional status is not required — only material participation.
How do I create the loss?
Usually through a cost segregation study plus bonus depreciation, which front-loads depreciation into year one.
What happens when I sell?
The accelerated depreciation is subject to recapture at sale, so the loophole defers tax rather than eliminating it.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.