This article focuses on answering the frequently asked question around the topic of the STR loophole in 2025: how to qualify, document material participation, time purchases/renovations, and leverage cost segregation and bonus depreciation without tripping common pitfalls.
1. What makes an STR qualify as “non-rental” for passive-loss rules?
If you meet one of the short-term lodging exceptions (e.g., average guest stay of 7 days or less, or 30 days or less with significant personal services, or extraordinary personal services), the activity isn’t treated as a rental for passive-loss purposes. You still must materially participate to make losses non-passive.
2. Do I still need to materially participate if I meet an STR exception?
Yes. To treat income/loss as non-passive, you must satisfy one of the seven IRS material-participation tests (e.g., 500 hours; 100+ hours and more than anyone else; substantially all; etc.).
More information can be obtained in the IRS Publication 925.
3. Do my spouse’s hours count toward material participation?
Yes. Your spouse’s participation counts toward your total for material-participation testing. Keep logs for both of you.
4. What hours don’t count toward material participation?
“Investor-type” time—e.g., general market research or reading articles—generally doesn’t count unless it directly relates to day-to-day operations of your specific activity. Focus on operational tasks (guest comms, turnovers, vendor coordination, pricing, maintenance).
5. Is my STR subject to self-employment (SE) tax?
Usually no if it’s a rental reported on Schedule E. If you provide substantial hotel-like services primarily for guest convenience (e.g., daily housekeeping, meals included), it can look like a Schedule C business, which can trigger SE tax.
6. Should I use Schedule E or Schedule C?
- Schedule E for most STRs (cleaning between guests and ordinary amenities).
- Schedule C when you provide substantial services similar to a hotel (and SE tax may apply). Ask your CPA if you’re near the line.
7. What about the $25,000 “active participation” allowance?
That allowance applies to passive rental losses and phases out at higher incomes. If your STR is non-passive (because you met an exception and materially participate), you’re not relying on the $25k rule.
8. How does personal use affect deductions?
If personal use exceeds 14 days or 10% of rental days (whichever is greater), vacation-home limits can restrict deductions. Keep personal stays short and well-documented; when on site, prioritize bona fide business tasks.
9. Can I convert a long-term rental to an STR mid-year?
Yes. Keep clean records. Periods operated as LTR follow LTR rules; periods operated as STR are tested under the STR exceptions and material-participation framework. Compute your average stay and services based on the STR period.
10. Do bookings that cross year-end mess up my “average stay”?
Treat a booking that spans December/January as one rental period when computing the year’s average period of customer use. One long stay can skew your average, make sure to monitor it during the year.
