Short-term rentals

The short-term rental loophole, explained

Rental losses are normally passive and can’t offset your wages or business income. A specific rule for short-term rentals can change that. Here is how it works, and why your hours log is the part that has to be airtight.

Updated · General information, not tax advice

Key takeaways

  • If guests stay 7 days or fewer on average, the property generally isn’t a “rental activity” under the passive loss rules.
  • If you also materially participate, losses from the property can be non-passive and offset other income.
  • The most common tests are 500 hours, or 100 hours and more than anyone else, including cleaners and co-hosts.
  • The IRS will ask for proof of hours. A contemporaneous log is your best evidence.

Why rental losses are usually stuck

Section 469 treats rental activities as passive by default. Passive losses can only offset passive income; the rest carries forward. Depreciation often creates a paper loss on a rental, but under the default rules that loss usually can’t reduce taxes on your salary or business income.

Two well-known ways around that are real estate professional status, which requires 750+ hours and most of your working time in real estate, and the short-term rental rule this guide covers.

Step 1: the 7-day average stay rule

Under Treasury Regulation §1.469-1T(e)(3)(ii)(A), an activity isn’t a rental activity if the average period of customer use is seven days or less. You calculate it by dividing total rental days by the number of separate stays during the year.

There is a second exception: average stays of 30 days or less where you provide significant personal services, comparable to a hotel. Most hosts rely on the 7-day test because it’s easier to show.

When the property isn’t a rental activity, it is evaluated like any other business under the passive loss rules. That makes the next question whether you materially participated.

Step 2: material participation

Regulation §1.469-5T(a) lists seven tests; you need to meet one each year. For short-term rental owners, these are the ones that usually matter:

TestWhat you must show
500 hoursYou worked 500 or more hours in the activity during the year.
Substantially allYour participation was substantially all of the participation by anyone, including non-owners.
100 hours and the mostYou worked more than 100 hours and at least as much as any other individual, including your cleaner or property manager.

Work by your spouse counts toward your hours, even if your spouse isn’t on the title. Investor-type work, like reviewing statements or reading market reports, generally doesn’t count unless you are directly involved in day-to-day management.

The 100-hour test is where many hosts trip up: a cleaner who spends three hours on each turnover can pass 100 hours quickly. Track everyone’s time, not just yours. See how to log participation hours.

Things to watch

  • Each property is generally tested separately unless you make a grouping election, so keep hours by property.
  • Personal use matters. Using the home yourself for more than the greater of 14 days or 10% of rented days brings in separate limits under §280A.
  • Large first-year deductions often come from a cost segregation study and bonus depreciation. Those are decisions to make with a CPA, not on your own.
  • Your state may not follow federal rules on depreciation.
This guide is general information, not tax advice. The short-term rental strategy is closely examined in audits. Work with a tax professional before relying on it.

Frequently asked questions

What is the short-term rental loophole?

It is the combination of two rules: a property with an average guest stay of seven days or less isn’t treated as a rental activity, and if you materially participate, its losses can be non-passive and offset other income such as wages.

Do I need to be a real estate professional?

No. Real estate professional status is a separate route. The short-term rental rule depends on average stay length and your material participation in that property.

Do cleaning crews’ hours count against me?

Under the 100-hour test you must participate at least as much as any other individual, so a cleaner’s or co-host’s hours matter. Under the 500-hour test, other people’s hours don’t matter.

How do I prove my hours?

With a record made at the time: dates, hours, and what you did, kept per property. Appointment books, calendars, and logs all count; vague year-end estimates are often rejected.

Sources

This guide is general information for U.S. federal taxes, current as of October 21, 2026. It isn’t tax, legal, or accounting advice. Talk to a qualified professional about your situation.

GuideLogging participation hoursThe 100-, 500-, and 750-hour tests explained, what counts as participation, and how to keep an hours log that holds up for short-term rentals and real estate.Who it’s forShort-term rental hostsLog material participation hours, scan cleaning and supply receipts, and track trips to your rentals. Records for short-term rental hosts and the STR loophole.GuideWhich receipts to keepWhich business receipts the IRS expects you to keep, the $75 rule for travel expenses, and how long to hold records: 3, 4, 6, or 7 years and when to keep them longer.
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