Investing in short-term rentals isn’t just about nightly rates – it’s also about savvy tax strategy. The Short-Term Rental (STR) tax loophole is a powerful method that lets real estate investors legally use losses from their Airbnb-style properties to offset other income (even a W-2 salary).

This loophole has saved investors thousands of dollars annually because, unlike most rental losses, these losses are treated as active business losses – no real estate professional status required. Now, thanks to a recent tax law (“Big, Beautiful Bill” of 2025), this strategy is becoming even more lucrative with the return of 100% bonus depreciation for rental property assets. In this guide, we’ll break down how the STR loophole works, what the new legislation means, and how investors can supercharge cash flow using bonus depreciation and cost segregation.

What Is the Short-Term Rental Tax Loophole?

The short-term rental (STR) tax “loophole” lets certain rentals be treated as an active business instead of a passive investment. Normally, rental losses are passive and can’t offset active income like W-2 wages or business profits. But if your property qualifies under the IRS short-term rental exceptions (for example, average stays of seven days or less) and you materially participate, then its income and losses are considered non-passive. That means depreciation and other paper losses can potentially reduce your active income.

If you operate a short-term rental (like through Airbnb or VRBO), the IRS has rules that in certain cases prevent the activity from being treated as a passive rental—so losses (including depreciation) may be used against your active income (wages, bonuses, etc.), provided you materially participate. These come from Publication 925, Passive Activity and At-Risk Rules and Temporary Regulation § 1.469-1T(e)(3)(ii).

Why is the STR Loophole so valuable? 

The power of the short-term rental (STR) loophole comes from turning what would normally be a passive loss into an active loss that can offset your regular income.

Under standard IRS rules, rental losses are passive and can only offset passive income. That means if your property shows a $20,000 tax loss (often from depreciation), you generally can’t use it against your W-2 wages or business profits. The loss just carries forward.

But if your property qualifies under the IRS short-term rental exceptions and you materially participate, that same $20,000 loss is considered non-passive. Now it can directly offset $20,000 of your salary or other active income. If you’re in a 35% tax bracket, that could mean a $7,000 savings on your tax bill.

This is why the STR strategy is especially valuable for high-income earners such as doctors, attorneys, or tech professionals. They often don’t have the time to log the 750 hours per year required for Real Estate Professional Status (REPS), but the STR loophole doesn’t require that level of commitment. Instead, you only need to meet one of the IRS’s material participation tests.

👉 Too confusing? Talk to our Bonus Depreciation Expert for FREE and let the experts formulate a plan for your short-term rental investment.