Short-term rental tax loophole: what it is and who qualifies

The short-term rental tax loophole, also called the STR loophole, is two rules read together. When the average guest stay is seven days or less, the IRS doesn't treat the property as a rental activity, so a loss isn't passive if you materially participate. Within limits, it can offset other income.

That matters most in year one, when bonus depreciation on a cost segregation study can turn a profitable rental into a large tax loss.

This is not tax advice, and both tests turn on your own records.

The seven-day test

The rule sits in Treasury Regulation § 1.469-1T(e)(3)(ii). An activity is not a rental activity for the year if the average period of customer use is seven days or less.

There is a second door. An average of up to 30 days also qualifies when you, or someone working for you, provide significant personal services with the stay. Services a long-term landlord also provides don't count. The regulation names cleaning common areas, routine repairs and trash collection.

Significance depends on frequency, the labor involved and the value of the services next to the price of the stay.

How the average is computed

Add up the days in every stay that ends during the year, including one still running on December 31. Divide by the number of stays (Reg. § 1.469-1(e)(3)(iii)).

It is an average across the year, which cuts both ways. Fifty four-day stays and ten 30-day winter stays come to 500 days over 60 stays, an average of 8.3 days. Ten bookings sink the year. None of them ran past a month.

Taking monthly guests in the off-season? Run the average before you accept the last few.

Material participation: three tests that fit a rental

The second rule is in Reg. § 1.469-5T(a), which lists seven ways to materially participate in an activity during the year. You need to meet one. Three of them fit a short-term rental:

• You work more than 500 hours on it during the year.
• Your work is substantially all of the work anyone does on it, counting people who own no part of it.
• You work more than 100 hours, and no other individual works more than you.

The third test is the one to watch if you have a cleaner. A cleaner who turns the unit over every few days, all year, can log more hours on the property than you do. So can a co-host. Their hours count against you even though they own nothing. Ask both for a number at year end.

Your spouse's hours count as yours, whether or not your spouse owns the property. That holds on separate returns too.

Some time doesn't count. Reviewing statements and monitoring the finances is investor work, unless you're directly involved in day-to-day operations. If you pay someone to manage the property, your own management hours drop out of the seventh test, the facts-and-circumstances one.

The cost segregation calculator runs the seven-day test and the three hour tests on your numbers before it touches depreciation.

What a non-passive loss allows, and what still caps it

A rental activity is passive even if you work on it full time, unless you qualify as a real estate professional. Passive losses offset only passive income. Your salary is not passive income.

Take the property out of the rental definition and the question changes. The Form 8582 instructions then ask whether the activity is a trade or business. Then, whether you materially participated. With two yeses, you report the income or loss on the forms you would normally use, not on Form 8582.

The rules say the activity isn't passive. That the loss then offsets your wages is a conclusion people draw, and it holds only inside two limits:

• At-risk rules. They apply before the passive rules, on Form 6198.
• Excess business loss limitation. It applies after them, on Form 461. Pub. 925 gives that order a heading of its own.

Which schedule the income lands on is a separate question, covered in our Airbnb tax guide for hosts.

Bonus depreciation after the 2025 tax law

Bonus depreciation lets you deduct part of an asset's cost in the year you place it in service, on top of regular depreciation. It only covers property with a recovery period of 20 years or less, under 26 U.S.C. § 168(k)(2)(A). The house itself never qualifies, at 27.5 years or at 39.

What qualifies is the shorter-lived property inside it. Under Pub. 527, appliances, carpeting and furniture used in a residential rental real estate activity count as 5-year property. Fences and shrubbery are 15-year.

Public Law 119-21, signed July 4, 2025, set the rate at 100% for property acquired after January 19, 2025, with no end date. Section 70301 dates the acquisition to the written binding contract, not to the closing. A contract signed before January 20, 2025 keeps the old phase-down. That means 40% for property placed in service in 2025 and 20% for property placed in service in 2026. After 2026, nothing.

For the first tax year ending after January 19, 2025, the same law lets you elect 40% instead of 100%. For a calendar-year filer, that year is 2025.

Used property qualifies, which matters if you buy an existing house, as long as you never used it before. Property bought from a related party doesn't qualify. Neither does a gift or an inheritance.

The IRS issued interim guidance on the new rate in Notice 2026-11 on January 14, 2026, and said proposed regulations would follow. States are another matter. California has not conformed to federal bonus depreciation, according to the FTB 3885A instructions.

Cost segregation: what a study moves

A house you buy lands on your depreciation schedule as one asset, the building. Land never depreciates, and Pub. 527 says landscaping is usually part of the land's cost.

A cost segregation study splits the building into components and moves each one to its own class. Carpeting and appliances become 5-year property. Once they leave the building, bonus depreciation can take them in the year the property is placed in service.

The IRS's guide to these studies is the Cost Segregation Audit Techniques Guide, Pub. 5653, written for examiners. It says the IRS "has not established any requirements or standards" for preparing one. It also tells examiners to treat rule-of-thumb percentages with caution, because a fixed share taken from industry averages lacks documentation. The guide is not an official IRS position. Its bonus rates predate the 2025 law.

There is no typical share to plug in, so the calculator asks for the one your study found.

The deduction also comes back. When you sell, gain on section 1245 property, which includes personal property such as appliances, is taxed as ordinary income up to the depreciation you took (Pub. 544).

A study has its own fee. Weigh it against the deduction it brings forward, and against the recapture it creates.

27.5 or 39 years for a short-term rental

Residential rental property depreciates over 27.5 years. The tax code excludes a unit in a hotel, motel or other establishment where more than half the units are used on a transient basis (§ 168(e)(2)(A)). Such a property can fall under the 39-year schedule for nonresidential real property.

Pub. 527 and Pub. 946 don't say how short a stay has to be to count as transient. Your preparer picks the schedule from your facts, and the calculator runs either one.

The seven-day test decides whether a loss is passive. The recovery period sets how fast the building is deducted.

A worked example

Take a $500,000 house, 20% of it land, placed in service in March 2026 under a contract signed in 2026. The building is $400,000.

Without a study, year one is $400,000 × 2.879% = $11,516, from the 27.5-year table in Pub. 946.

Now suppose a study moves 25% of the building to shorter lives: $60,000 to 5-year property and $40,000 to 15-year property. Both get 100% bonus depreciation. The full $100,000 comes off in 2026, and the remaining $300,000 of building adds $8,637.

Year one comes to $108,637, which is $97,121 more than without the study.

At a 32% federal bracket, the estimated federal effect of that $97,121 difference is about $31,100 of tax for the 2026 return. It holds only if the activity passes both tests and neither limit caps the loss. A loss that stays passive carries forward. It is generally allowed in full when you sell your entire interest to an unrelated buyer.

Before any of this, check that the property makes money. The Airbnb income calculator runs the cash flow after the mortgage and taxes.

Proving your hours

You don't need a contemporaneous daily log. The IRS accepts any reasonable way of showing the services you performed and roughly how long they took, under Reg. § 1.469-5T(f)(4). An appointment book works. So does a calendar, or a narrative summary.

A calendar kept as you go is still easier to stand behind than a summary written in April. It shows what you did on the day you did it.

Get the cleaner's hours too. The 100-hour test compares you with every other individual.

Frequently asked questions

Sources

• Treasury Regulation § 1.469-1T(e)(3)(ii) and (iv), rental activity exceptions and significant personal services, eCFR, current as of September 30, 2026.
• Treasury Regulation § 1.469-1(e)(3)(iii), average period of customer use, eCFR, same date.
• Treasury Regulation § 1.469-5T(a), (f)(2)(ii), (f)(3) and (f)(4), material participation, investor work, spouse's participation and proof, eCFR, same date.
• IRS Publication 925 (2025), Passive Activity and At-Risk Rules.
• IRS Instructions for Form 8582 (2025), Passive Activity Loss Limitations.
• Public Law 119-21, § 70301, approved July 4, 2025.
• IRS Notice 2026-11, interim guidance on § 168(k), January 14, 2026, published in I.R.B. 2026-6.
• 26 U.S.C. § 168(e)(2)(A) and § 168(k), US Code, 2024 edition.
• IRS Publication 527 (2025), Residential Rental Property.
• IRS Publication 946 (2025), How To Depreciate Property, Table A-6.
• IRS Publication 5653 (2-2025), Cost Segregation Audit Techniques Guide.
• IRS Publication 544 (2025), Sales and Other Dispositions of Assets.
• IRS news release IR-2025-103, October 9, 2025, 2026 federal tax brackets.
• California Franchise Tax Board, 2025 Instructions for Form FTB 3885A.