The STR Loophole: Short Stays & Services
Under IRC §469 and IRS rules, a rental activity is automatically passive except for two main exceptions. One exception is being a Real Estate Professional (750+ hours, etc.), but even without that, short-term rentals get a break. The IRS says an activity is not treated as rental (and thus can be a business) if any of these apply:
- 7-day rule: Average guest stay is 7 days or less. In practice, total all rental days in a year and divide by number of stays – if ≤7, you qualify.
- 30-day + services rule: Average stay ≤30 days AND you provide significant personal services. (If stays are 8–30 days on average, but you offer hotel-like services – e.g. cleaning, meals, concierge – this counts.)
- Extraordinary services: If your business is basically a hotel/resort (guests get lots of services beyond ordinary lodging), then it’s also not treated as a rental.
In everyday terms, keeping stays very short (weekly or less) automatically makes the IRS view the property as a nonresidential business. The STR loophole lets losses be treated as non-passive if average stays are 7 days or fewer and you materially participate. If your stays average more than 7 days, you can still qualify by providing substantial services (like daily housekeeping, meals, etc.) to push it into the business category.
Once an activity qualifies under one of these exceptions, it is treated as a trade/business, not a passive rental. You then apply the material participation tests. If you also materially participate, your STR income/loss is non-passive. In effect, this “loophole” lets you bypass the usual passive‐loss limits. For example, IRS Publication 925 notes that if an STR meets the short-stay exception and you materially participate, the losses are not passive. In practice, this means you could use accelerated depreciation (even 100% bonus depreciation) and other deductions to offset your ordinary income.
How to Qualify: Practical Steps
- Track Your Guest Stays: Calculate the average period of customer use. If you have multiple listings or room types, you do a weighted average. Aim for an average stay of ≤7 days. (Even 6.9 days works.) If you can’t manage sub-weekly stays, try offering substantial hotel‐type services so the 30-day exception applies.
- Work the Property: Spend real time on-site and managing the business. Common qualifying activities include cleaning/turnover, guest communication, marketing/listing management, maintenance, accounting, and coordinating outside services. Keep a log of hours and tasks. IRS allows any reasonable proof of participation.
- Meet a Participation Test: Most STR owners aim for >500 hours/year, but if that’s too much, remember the other tests. For example, working 150 hours when no one else does more can qualify. Also remember spouse’s hours count if you file jointly. Decide which test you can meet and monitor it.
- Document Everything: We recommend tracking dates and hours in real time. The IRS expects contemporaneous records (calendars, logbooks, or apps). Note that travel time, investment research or acquisition effort doesn’t count. Only include time spent directly on operations.
- Choose the Right Tax Forms: If you qualify, the income/loss from the STR will go on your business return (e.g. Schedule C or E as an active business, depending on whether services made it “like a business”). Many advisors treat qualified STR income on Schedule E but label it non-passive on Form 8582. (Check with a tax professional; see also our FAQ on whether STR income goes on Schedule C) The key is that losses will flow past the passive-loss rules once material participation is established.
Following these steps lets you claim STR deductions fully. As the Chalet bonus depreciation in 2025 guide explains, “If you pass one [material participation] test and your property qualifies as a short-term rental under IRS rules, your activity is treated as non-passive. That means depreciation and other paper losses can offset active income such as W-2 wages or business profits.” In other words, those vacation home expenses suddenly become powerful tools to reduce your taxable income.
Tax Benefits & 1031 Exchange Strategy
The main benefit is unlimited losses now (subject to your at-risk/basis limits), which would otherwise be capped at $25,000/year for active participants. In practice, STR investors often combine this with accelerated depreciation. For 2023–2024, 100% bonus depreciation is available on most improvements, thanks to recent tax law changes. By classifying your STR as an active business and doing a cost segregation study, you can write off huge chunks of your purchase and renovation costs immediately.
Indeed, financial experts call this “turbo-charging” your tax savings. For example, Chalet notes that with 100% bonus depreciation back in 2025, “investors who act strategically can recover a large portion of their capital investment” when the STR loophole is used. WCG CPAs similarly explain that as a trade/business you can use Section 179 expensing and 100% bonus depreciation on qualified property, accelerating deductions into the early years. These deductions can significantly boost cash flow on new rentals.
Another powerful strategy is combining bonus depreciation with a 1031 exchange. A 1031 exchange allows you to sell an investment property and reinvest the proceeds into another of equal or greater value without paying capital gains taxes at the time of sale. When investors use this strategy to move from long-term rentals into short-term rentals, they can defer their tax bill while resetting depreciation on the new property — unlocking fresh deductions through cost segregation and bonus depreciation.
As explained in our 1031 exchange guide and in our article on combining 1031 with the STR loophole, this pairing lets investors both defer taxes and accelerate write-offs. By rolling gains forward and reclassifying the replacement property as an active short-term rental that meets material participation rules, you can convert deferred capital gains into immediate deductions, a high-leverage move that amplifies after-tax cash flow.
Important Pitfalls
- Don’t Go “Over-C”: If your STR starts looking exactly like a hotel (renting daily with many services), the IRS may require you to report it as a business on Schedule C and pay self-employment tax. Small touches (cleaning and email responses) are fine, but if you provide meals, concierge service, or maid service regularly, consult a pro.
- Real Estate Professional (REPS) Status: This STR loophole works even if you don’t qualify as a real estate professional (750+ hours in real estate). In fact, many STR owners have W-2 jobs; the two rules are separate. The key is meeting the short-stay exception and material participation. If you also qualify as a RE professional, then all rental activity can be non-passive anyway, and STR vs long-term distinction doesn’t matter as much.
- Record-Keeping is Critical: The IRS may scrutinize passive loss claims. You must be able to prove the hours and tasks. Missteps like logging only round numbers (e.g. “3 hours daily” without detail) or post-dating logs can raise red flags. Use detailed contemporaneous records.
- Personal Use Rules: If you use the home yourself for more than 14 days (or >10% of rental days), it may count as a personal residence. That’s governed by IRC §280A and Pub 527, and it can limit deductions. (This is a separate issue, but keep track of personal nights)
- Changing Business Model: If you switch between long-term leases and STR use, average stay calculations reset. Consult a tax advisor about transition strategies (e.g. prorating business activity for a partial year).
Conclusion
In summary, the STR loophole lets eligible Airbnb owners turn their rental into an active business. To qualify, you must (1) meet the IRS’s short-stay tests (generally, average guest stay ≤7 days) and (2) materially participate under the IRS’s 7-test rules.
When both are true, losses from depreciation and expenses can offset other income. The payoff can be huge – especially today with 100% bonus depreciation. We’ve covered the main rules here, but in-depth guides dive deeper into topics like bonus depreciation, cost segregation, and detailed FAQs. Be sure to keep impeccable records of your stays and time spent. With proper planning, the STR loophole can legally demystify the tax code and turn passive losses into powerful tax deductions.
If you would like to discuss the topic of bonus depreciation, cost segregation and prepare a strategy that would be tailored to your investment needs, click on this link to connect to a Chalet bonus depreciation specialist completely free of charge.
