Definition
The short-term rental exception is a provision in the passive activity rules that can let owners of short-term rentals deduct losses against ordinary income without qualifying as a real estate professional.
How It Works
When the average guest stay is seven days or fewer, the activity is not treated as a rental under Section 469. It is treated more like an operating business. If the owner materially participates, by meeting a test such as more than 100 hours and more than anyone else, the losses, often amplified by cost segregation and bonus depreciation, can offset W-2 or business income.
Example
A surgeon buys a beach property run as a short-term rental with an average stay under seven days, materially participates in operating it, and uses first-year cost segregation losses to offset W-2 income.
When It Works Best
It is most useful for high earners who cannot meet the REPS hour requirements but can materially participate in a short-term rental.
Who It Applies To
Owners of short-term rental property who actively participate in running it.
Watch-Outs
The average-stay calculation must be documented, material participation must be genuine and logged, the IRS is actively auditing these positions, and depreciation taken is recaptured at sale.
