If your average guest stay is 7.0 days or less and you materially participate, your rental losses may be treated as non-passive. Combined with a cost segregation study and bonus depreciation, that can move large deductions into the early years of ownership. It depends on facts, records, and other limits.
This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.
1. Why rentals are usually “passive”
Under IRC § 469, rental activities are generally treated as per-se passive. A high-earning household with W-2 income normally cannot use passive rental losses against wages unless an exception applies.
2. The 7-day exception
Treas. Reg. § 1.469-1T(e)(3)(ii)(A) says an activity is not a “rental activity” when the average period of customer use is 7 days or less. Average period of use is total days of customer use divided by the number of separate rental periods. Once the activity is outside the rental definition, per-se passive treatment does not apply.
3. Material participation
Treas. Reg. § 1.469-5T(a) lists seven tests. Three are common for STR hosts:
- Test 1 (500-hour test): You and your spouse combined participate for more than 500 hours during the year.
- Test 2 (Substantially all): You and your spouse perform substantially all participation in the activity, including cleaning and maintenance.
- Test 3 (100-hour test): You and your spouse participate for more than 100 hours and more than any other individual, including cleaners, handymen, and property managers.
4. Where cost segregation fits
A cost segregation study reclassifies parts of the property into 5-, 7-, and 15-year lives. For qualifying property acquired and placed in service after January 19, 2025, those parts can be eligible for 100% federal bonus depreciation under OBBBA.
5. What can limit the benefit
- IRC § 461(l) excess business loss limits cap how much loss offsets non-business income in a year ($256,000 Single / $512,000 MFJ in 2026), with the remainder carried forward as an NOL.
- IRC § 280A(d)(1) personal-use days (exceeding the greater of 14 days or 10% of fair rental days) prevent rental losses from offsetting other income.
- Depreciation recapture applies when you sell.
- Several states (such as CA, NY, NJ, PA, HI, MA, MN, WI) do not follow federal bonus depreciation.
This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.