Short-Term Rental
Convert passive rental losses to active losses offsetting W-2 income.
Overview
Short-term rental properties with average guest stay of 7 days or less qualify for exception to passive loss limitations when owner materially participates in operations.
This exception allows rental losses (often generated through cost segregation) to offset W-2 wages or business income rather than being limited by passive loss rules.
Requirements
Average Stay Duration
Average guest stay must be 7 days or less. Calculated as total rental nights divided by number of guest stays.
Substantial Services
Property must provide substantial services beyond typical long-term rentals (cleaning, concierge, breakfast, etc.).
Material Participation
Owner or spouse must materially participate in rental operations (typically 500+ hours annually or more than any other individual).
Tax Benefits
Example: Airbnb property generates $160K active loss through cost segregation in year one, saving $59K in taxes by offsetting W-2 income at 37% rate.
Active loss classification allows full deductibility against other income sources without passive loss limitations.
Multi-year benefit as accelerated depreciation and ongoing expenses continue to generate deductions against rental income or other sources.
Implementation
Property Selection
Identify property suitable for short-term rental operations in market with strong vacation rental demand.
Cost Segregation Study
Commission engineering study to identify accelerated depreciation components and maximize first-year deductions.
Documentation
Maintain detailed time logs documenting material participation hours. Track average guest stay duration and services provided. Coordinate with CPA for proper tax reporting.
Important Considerations
Material participation requires substantial time commitment and detailed documentation. Inadequate documentation may result in passive loss classification upon audit.
Average stay calculation must be accurate. Single long-term stay can disqualify property from exception for entire year.
Local regulations may restrict short-term rental operations. Verify zoning and permit requirements before property acquisition.
Coordinate with your CPA to determine optimal structure and evaluate material participation documentation requirements for your specific situation.
Discuss Implementation
Contact us to evaluate short-term rental strategy for your properties.