STR Tax Loophole/Strategy So Close to the End of the Year?

[Carolyn McBride]

I'm about to go into contract on a property I want to use as an STR. I'll likely close on the property around early November and it will need small cosmetic updates, maybe a new deck, and of course new furniture set up.

Since it's so close to the end of the year, I'm wondering if anyone else has had success with the STR loophole requirements and material participation when acquiring a property with only two months left in the year? I'm planning on trying to complete 100 hours of material participation...

Did the IRS have issues with the 100 hours of material participation for only two months out of the year? What types of work were you able to capture as "material participation"? And what are the requirements for how many days the Airbnb needed to have been rented in that year?

I'm wondering if I can qualify by using just 1 or 2 bookings (under 7 days of course) for the year.

[Sean Graham]

Quote from @Carolyn McBride:

I'm about to go into contract on a property I want to use as an STR. I'll likely close on the property around early November and it will need small cosmetic updates, maybe a new deck, and of course new furniture set up.

Since it's so close to the end of the year, I'm wondering if anyone else has had success with the STR loophole requirements and material participation when acquiring a property with only two months left in the year? I'm planning on trying to complete 100 hours of material participation...

Did the IRS have issues with the 100 hours of material participation for only two months out of the year? What types of work were you able to capture as "material participation"? And what are the requirements for how many days the Airbnb needed to have been rented in that year?

I'm wondering if I can qualify by using just 1 or 2 bookings (under 7 days of course) for the year.

@Carolyn McBride you're on the right track! Yes you can definitely qualify for the STR loophole if you materially participate and keep the average rental period at 7 days or less. I recommend renting it out a couple times before year-end.

Material participation doesn’t mean it has to be 100 hours. You could also qualify if you spend more time on the property than anyone else involved, regardless of hitting 100 hours.

Ex. managing contractors, handling bookings, setting up the property, or dealing with guest communications, you might meet the material participation requirement without needing to track 100 hours.

The key is to document everything. The IRS doesn’t seem to have a problem with people who meet the material participation requirements even with only a few months left in the year, as long as the hours and tasks are well-documented.

[Aus Smith]

Hey, 

Yes, this is definitely possible. You will need more than one visit to substantiate an average stay of less than 7 days. It is ideal to get as many stays as possible before yearend. You will want to substantiate your material participation through logs. The material participation test consist of seven test in total. The test you are trying to pass is the 100 hours and no less than any other individual. Another test is that you substantially constituted all participation. Under audit, the auditor will seek substantiation that what you reported was truthful. As long as you can substantiate it with proper documentation, you should be good. If your material participation consists of mostly time to manage bookings, this may not make logical sense with a low number of stays. Just a word of note, stays comped and comped for chartable reason and family members would constitute personal days. Just giving out free stays near yearend will not help in maintaining customer stays. These are the items to look out for with your tax professional. Have them look over your material participation log to make sure they agree. Some preparers may take your word and just say have your logs ready in case of an audit. Most tax preparers include in their engagement letter that you have ultimate responsibility to what is reported on the return. I wish you luck on your endeavors! The IRS has more funding and is beefing up their audits. This doesn't mean that you shouldn't be aggressive with your tax strategies, but you should be diligent with your documentation for substantiation. 

I hope this helps! Austin L. Smith, CPA 

[Account Closed]

Quote from @Carolyn McBride:

I'm about to go into contract on a property I want to use as an STR. I'll likely close on the property around early November and it will need small cosmetic updates, maybe a new deck, and of course new furniture set up.

Since it's so close to the end of the year, I'm wondering if anyone else has had success with the STR loophole requirements and material participation when acquiring a property with only two months left in the year? I'm planning on trying to complete 100 hours of material participation...

Did the IRS have issues with the 100 hours of material participation for only two months out of the year? What types of work were you able to capture as "material participation"? And what are the requirements for how many days the Airbnb needed to have been rented in that year?

I'm wondering if I can qualify by using just 1 or 2 bookings (under 7 days of course) for the year.

Hello Carolyn, 

To qualify for the short-term rental (STR) tax loophole and meet material participation requirements with only two months left in the year, the IRS does allow material participation to be spread over a short time frame, as long as you meet the specific thresholds. The 100 hours rule can be satisfied as long as no one else (including contractors) materially participates more than you. Typical activities that count toward material participation include managing bookings, communicating with guests, handling maintenance, and setting up the property (e.g., furnishing, updating the deck).

As for the rental days, there's no strict minimum for the year, but the STR loophole generally applies when average guest stays are less than 7 days. So, if you secure just 1 or 2 bookings under 7 days, you could potentially meet the criteria, provided you demonstrate material participation and proper active management of the property. Always consult a tax professional to ensure you meet all the IRS guidelines and documentation requirements.

[Ashish Acharya]

Yes, you can qualify for the STR tax loophole even with only two months left in the year. You'll need to meet the 100-hour material participation rule by actively managing the property—tasks like updates, repairs, and managing bookings count. Or you could meet the substantial participation rule that has no hour requirement.

The property also needs to be rented for fewer than 7 days per guest on average. While there’s no specific number of bookings required, having at least 1-2 bookings should help.

*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Michael Plaks]

@Carolyn McBride

Unfortunately some of the information in the replies was incorrect or contradicting. You have 3 tests to meet in 2024, all 3 of them.

1. Average stay less than 7 days. This requires a minimum of TWO booked and completed stays, one is not enough, as was tested in court. These bookings need to be from different guests (not the same guest back-to-back) and at full market price, as opposed to discounted stays for friends.

2. No more than 14 personal use days. Free or discounted stays by friends and family count as "bad" personal use. Your own stay if you're doing maintenance/repair work does not count.

3. Material participation. You have two options here, either-or. Either you do all the work yourself, i.e. no contractors, no managers and no cleaners - or you do 100 hours of hands-on work and none of these other people do more hours than you. If you do everything yourself, you don't need 100 hours.

[Aus Smith]

Couldnt agree more with number 2. I acknowledged avoiding personal days, but neglected to mention the 14 day rule. I see this being overlooked by tax strategist on social media as well. I can see how I can confuse the issue by leaving that detail out. Thanks for clarifying! 

Cheers!

Austin L. Smith, CPA

[Carolyn McBride]

Wow, thank you all for the great advice and feedback. There is so much nuance to these strategies.

Another question popped up since my closing date is looking like it might get pushed back... what happens if the investor is not able to meet the material participation requirement by the end of the year? 

Will they lose their ability to deduct bonus depreciation against their regular 9-5 income for all future years? Is there a way to retroactively deduct bonus depreciation against their later income? If so, would they be capped at the 60% bonus depreciation limit of the purchase year or <40% limit depending on the year they met their material participation limit?

[Michael Plaks]

Quote from @Carolyn McBride:

Wow, thank you all for the great advice and feedback. There is so much nuance to these strategies.

Another question popped up since my closing date is looking like it might get pushed back... what happens if the investor is not able to meet the material participation requirement by the end of the year? 

Will they lose their ability to deduct bonus depreciation against their regular 9-5 income for all future years? Is there a way to retroactively deduct bonus depreciation against their later income? If so, would they be capped at the 60% bonus depreciation limit of the purchase year or <40% limit depending on the year they met their material participation limit?

You got it right: a lot of nuance. And your follow-up questions are no exception.

If you place it in service in 2024 but do not meet material participation - you can still claim bonus depreciation but it will be locked up and will not be useful as an offset for your W2. If you wait to place it in service until 2025 (or it simply is not ready until 2025) and you do meet material participation for 2025 - you can use bonus depreciation in 2025 but at 40% instead of 60%. And there is more to discuss here, really.

[Basit Siddiqi]

If you acquire the property in the middle of November(Assumption of November 15th), you will need to clock in about 2 hours a day.

You might be able to log in a lot of the hours as you furnish and rehab the property leaving you with 30-minutes / 1 hour towards each guest check in / check out.

It is do-able but obviously, sometimes, the more time the better.