Most rental losses are trapped — they can only offset other passive income. But when your property's average guest stay is 7 days or fewer and you materially participate, the IRS no longer treats it as a "rental activity." The losses become active, and active losses can offset your salary, your business income, almost anything. For high earners running Airbnbs, this one distinction is worth thousands.
Under IRC §469, rental real estate is passive by default — losses can only offset passive income, not your W-2 or business profit. That's the wall most investors hit. But the regulations carve out an exception: if the average period of customer use is 7 days or fewer, the activity isn't a "rental activity" at all. It's treated like an operating business.
Once it's a business rather than a rental, the passive loss rules no longer apply. The only question becomes whether you materially participate. If you do, your losses — including the large paper losses created by bonus depreciation and cost segregation — become active and can offset your other income.
A W-2 professional buys a short-term rental, runs a cost segregation study, and generates a large first-year paper loss. Because the average stay is under 7 days and they materially participate, that loss is active — and can offset their salary. Pairing this page's strategy with cost segregation is where the real leverage comes from.
Total rental days divided by number of bookings must average 7 days or fewer over the year. Booking records prove it — we help you keep them clean.
Meet one IRS test — typically 500 hours, or 100+ hours and more than anyone else, or substantially all the work. Self-management is key.
Pass both and depreciation-driven losses offset W-2, business, and other active income — no passive limitation, no real estate professional status.
Hiring a full-service property manager often blows the material participation test, because the manager does more of the work than you do. Documentation also matters: without contemporaneous time logs, the IRS can disallow the position on audit. We set up the structure and the records so the strategy holds up.
The first consultation is free. We'll tell you whether the STR exception fits your situation — before you bank on it.