All Forum Posts by: Stephen Nelson

Quote from @Stephen Nelson:

You can use a cost segregation study and bonus depreciation on more than one property.

Also just to confirm this, if your average rental interval is 7 days or less and you materially participate? Section 469 doesn't limit the losses the depreciation generates because they're not passive. The losses are nonpassive.

But if you really go gangbusters with this, there are other limiters. One you may encounter is the Section 461(l) excess business loss limitation. Basically it says you can shelter any amount of business income with a business loss (like from a STR). But you're limited in the amount of business loss you can use to shelter nonbusiness income like W-2 income and portfolio income.

In 2025, the excess business loss limitation is $313,000 for single filers and $626,000 for joint return filers.

Example: You have no business income, are single, generate $1,000,000 on your W-2 and lose $500,000 on your STRs. You can use only $313,000 of the business losses from the STRs to shelter up to $313,000 of the W-2 income.

The unused excess business losses then turn into net operating losses and carryforward to the next year.

Excellent information! My stats are income W2 (HOH) approximately 400k and the STR was 389k-put 85k down with a mortgage of 310k. Payment is $2500ish, plus upkeep/utilities-total 3k. The STR had about 40k in furnishings and landscaping etc. it currently generates 6-7k per month. Cash flow 3k-4K. I absolutely participate as I clean and also do all the guest messaging and Airbnb work plus driving. The average stay is definitely less than 7 days. 
I don’t think I will get anywhere near that limit of 313k but it’s good to know. I guess it also depends on the percentage allowed for that bonus depreciation (40% vs possible new rate)
I would love to pick up another home bc I want to eventually “escape the matrix” lol

thank you!

@Stephen Nelson Good catch and thank you for that correction! If you don't mind me asking, how do you achieve material participation with only 5 hours per week?

@Dylan Brown hi I'm wondering what you are suggesting when you say after they sell the asset any passive losses from that activity can offset all types of income.

It would be limited to recapture and other passive losses unless the losses are qualified as active, right?

Quote from @Stephen Nelson:

To use the mini-storage losses to shelter other income, the losses need to be nonpassive.

The losses are not nonpassive just because the investor is a real estate professional. He'd need to be a real estate professional and materially participate in the ministorage business to make real estate losses nonpassive.

I've never heard a CPA distinguish between REPS status and REPS without active participation.  Every CPA I've talked with says that to achieve REPS status you need to be actively engaged in real estate (plus other qualifications I will leave out.)

FWIW, the poster did not say whether or note he materially participated in real estate outside of the self-storage passive investment.

Thanks for explaining your PoV.

*This article is not tax advice and you should always consult with your CPA before making tax or financial decisions.

Intro

The Short Term Rental Loophole is a tax strategy where you change the losses on your Real Estate from Passive to Active. Normally, Real Estate is considered a Passive Loss when it comes to depreciation of the building, and any other expense. This means that you can only write off these Passive Losses from your Passive Income, and not against your W-2 or 1099 income which is considered Active Income. To execute this strategy, you will simply change your real estate from this Passive Loss to an Active Loss, which would then allow you to write off your real estate depreciation and expenses against your W-2 and 1099 Income.

In this article I’ll explain the basics of the Short Term Rental Loophole and current trends in the Airbnb market. By the end you will know if this strategy could potentially work for you or not and is worth pursuing further.

Material Participation

In order to change your real estate into an Active Loss, you must be “Materially Participating” in the property, or be classified by the IRS as a “Real Estate Professional”. This means the average stay at your property cannot be more than 7 days, you will need to pass the tests of Material Participation or being a Real Estate Professional, and keep a log of the hours you spend performing “activities” for the real estate.

In order to Material Participate, you need to pass one of the seven tests for Material Participation on the property. The two main ones that apply to most people are you either spend more than 500 hours Materially Participating on the property, OR you spend 100 hours Materially Participating on the property and no one else spends more hours than you. Make sure to consult with your CPA about which hours can be used before starting your hours log.

Here are the indicators that put you at risk of an Audit that the IRS looks at with this strategy::

(Source)

Real Estate Professional

If you don’t have the ability to invest these kinds of hours into a property, you can become a Real Estate Professional under the tax code, or have a wife or husband become a Real Estate Professional, which then will turn your Passive Losses into Active Losses on your real estate.

To become a Real Estate Professional, you need to have:

(Source)

As long as you work 750 hours in real estate (14.42 hours a week excluding vacation), AND half your time is spent on real estate activities (so you could still do other work for 12-13 hours a week), you can qualify as a Real Estate Professional. One thing to be mindful is to be sure that 500 of those 750 hours are spent in a materially participating way to make sure you meet the Material Participation test, which is why it is best to consult with your CPA about your hours log before getting started, since not every hour spent on the property will necessarily count as Material Participation, so it’s best to know where to prioritize your hours and where to outsource.

Bonus Depreciation

Bonus Depreciation from a Cost Segregation Analysis allows you to depreciate Personal Property and Land Improvements on shorter depreciation schedules, and then accelerate some of that into the first year. The Trump administration added Bonus Depreciation in 2017 in the Tax Cuts and Jobs Act (TCJA), which allowed you to depreciate items with a “life” of less than 20 years all into year 1. Bonus Depreciation is in its scheduled phase down which started in 2023, where the percentage you could take of the Bonus Depreciation decreased to 80%, and has been decreasing 20% ever since, currently at 40% in 2025. Before the Tax Cuts and Jobs Act the Bonus Depreciation was 50%. On March 4th 2025 in President Trump's address to congress, he stated bonus depreciation will be coming back to 100% (Source) (Source 2), and Trump’s new TCJA budget framework was just passed by the Senate on April 5th. (Source). The downside to this strategy is that you will need to recapture the depreciation when you go to sell, unless you do a 1031 Exchange into a new property, in which case you would not pay any capital gains tax or depreciation recapture.

By using Bonus Depreciation with a Cost Segregation Analysis you are moving a very large amount of your depreciation write offs for your real estate into the first year, allowing you to show a large “paper loss” that year even if you are cash flowing.

Changes in Airbnb Regulations and Trends

For most people, the most realistic way to execute the Short Term Rental Loophole is through acquiring Airbnbs. However, that has come with a few challenges recently as many destination markets have clamped down on Airbnb regulations and many have also seen a dramatic increase in supply of listed Airbnbs, particularly over the last few years when the Travel sector boomed coming out of the Pandemic. For example, in September of 2023 New York mandated that all short term rental hosts must reside at the property.

To avoid regulation change issues, it is key to make sure you are buying in established Vacation markets and that your communicating with the City or County in which the property is located to understand what the current sentiment of the people and stance of the city is on coming Airbnb regulations, and avoiding properties located within HOAs / Condo Associations / Co-Ops. You also want to make sure you protect your downside in the case regulations do emerge down the line, by looking at the Mid Term and Long Term Rental rates on the property as well to make sure it is something you could live with in the case there was a change.

With the amount of Airbnb listings continuing to grow rapidly, it is become increasingly more important to provide a quality service to make your property stand out among the rest. The advantage of Airbnb vs Hotels is that they offer more of an experience and immersion into the place where they are located, and if the property isn’t offering that at a high level it won’t stand out among the rising supply of listings. Hiring a professional Interior Designer who can help you set up the space and create a theme for the house, and a consulting a professional Property Manager who can teach you how to give exceptional hospitality to the guests and marketing to the property, is the winning formula for creating a profitable listing in the current environment. Hiring a full time Property Manager will likely make it difficult to execute the Short Term Rental Loophole, but many Property Managers offer consulting to allow you to fast track your learning curve on providing exceptional service.

Buying top of the line furniture and amenities for guests is another way to create the highest quality Airbnb. Although these things require a greater investment up front, these are additional expenses that can be used as write offs against your W-2 and 1099 income on top of the accelerated depreciation in Year 1, and in the long term will result in a well known Airbnb in your market that keeps your guests coming back to book every year, increasing your Occupancy and Average Daily Rate over time.

(Source)

Conclusion

By turning your real estate losses from Passive to Active, you unlock the ability to write off those real estate paper losses against your W-2 and 1099 income, which for some people, if you have the ability to execute on this strategy, can result in massive savings. Trends in the Airbnb space are moving toward higher quality Airbnbs, and these luxury amenities provided can contribute toward your tax write offs toward your W-2 and 1099 income, however it is important to do thorough due diligence and to have a backup plan in the case Airbnb regulations change in your area.

In order to execute this strategy, you’ll want to build a team of a CPA that specializes in these types of tax filings, a Cost Segregation Engineer, Interior Designer, a Loan Officer, Insurance Agent, Short Term Rental Consultant, and a Title company, all of which a Realtor specializing in Airbnbs should be able to refer to you. There are many ways to use this strategy based on your personal situation, and consulting with the right team is the difference in executing this strategy successfully.

Thank you for reading my article on the Short Term Rental Loophole, I hope you enjoyed it and found it helpful!

I appreciate your attempt at educating folks with your post, but personally it really bothers me when people keep referring to what is in the tax law as loopholes. It is not a loophole, it is tax law. Per the tax law you can do these things, it is not a loophole.

No offense intended, but so many people use this term and to the uneducated, they believe someone is evading tax law or doing something shady when they hear people using the term "loophole". 

If you have Real Estate Professional Status (REPS - a specific IRS designation not a "do you invest in real estate" question) you can deduct 100%.  If you are not, it depends on your income and you are capped at $7K.