Short-Term Rental (STR) Loophole

Treasury Regulation §1.469-1T(e)(3)(ii) provides that certain short-term rental activities are non-passive for tax purposes. A rental may qualify as non-passive if either:

The average guest stay is seven days or less, or
The average guest stay is 30 days or less and the owner (or their agent) provides significant personal services, such as frequent cleaning, guest support, concierge-type services, or other operational assistance.

When these conditions are met and the owner materially participates, the IRS treats the activity as an operating business rather than a traditional rental. As a result, losses generated by the property—including depreciation-related paper losses—may be classified as non-passive and used to offset other income, such as W-2 wages or 1099 earnings.

Contact us today and let us help you find the perfect short-term rental to provide you with immediate cash flow today while drastically reducing or eliminating your tax bill!

Use Case Example

Turn Your Tax Bill Into a Wealth-Building Asset

A married couple earning $150,000 per year can legally reduce their taxable income to $0 by purchasing a properly structured short-term rental.

By acquiring a $450,000 short-term rental, allocating 25% to land and 75% to the building, and leveraging cost segregation with bonus depreciation, investors can generate nearly $240,000 in first-year paper losses—even though short-term rentals depreciate over 39 years.

Because qualifying short-term rentals are treated as a non-passive business—either when average stays are seven days or less and the owner materially participates, or when average stays are 30 days or less and the owner (or their agent) provides significant personal services—losses may be used to offset W-2 income without requiring Real Estate Professional Status.

At a 22% tax rate, this can translate into approximately $33,000 in federal tax savings in year one, while guest revenue helps cover the mortgage and the property continues to generate cash flow and appreciate.

Why High Earners Benefit Even More

The value of depreciation scales with income. The more you earn—and the higher your tax bracket—the more valuable every dollar of depreciation becomes. That means high-income professionals often unlock significantly greater tax savings from the same short-term rental investment, making this strategy especially powerful for dual-income households and W-2 earners with limited deductions.

Why This Works

Short-term rentals qualify for non-passive treatment
Cost segregation accelerates depreciation into earlier years
Bonus depreciation front-loads deductions
W-2 income can be offset without quitting your job
Higher tax brackets = greater tax efficiency
You keep the asset, the cash flow, and the upside

The Bottom Line

Short-term rentals aren’t just an investment—they’re a tax strategy. For high earners, they provide one of the few legal ways to convert higher income (and higher taxes) into accelerated wealth, which is why short-term rental investing becomes more valuable as your income grows.

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Frequently Asked Questions

Is the Short-Term Rental Loophole Legal?

Yes-we use the strategy ourselves and are partnered with leading tax attorneys and accountants that support as well.

Can the losses offset both my income and my spouse’s income?

Yes. Married-filing-joint taxpayers share the benefit.

Can Turbo Charge Real Estate help me find and acquire STR properties?

Yes. We specialize in identifying and acquiring cash-flowing short-term rental investments in high-demand, tourism-driven markets primarily in Florida. We focus on prime STR-friendly locations such as beach towns, Central Florida near the major theme parks, South Florida, the Florida Keys, and other top vacation destinations where guest demand stays strong year-round.

Can having a property manager prevent me from qualifying?

Yes. Using a full-service property manager makes it difficult to meet the material participation tests because their hours count against yours. To qualify, you usually need to manage the property yourself or use a "half-service" manager and ensure your hours of involvement exceed theirs.

Can Turbo Charge Real Estate help me start a property management business?

Yes. We can absolutely help you start a property management business. We provide step-by-step guidance on everything from setting up your business structure, choosing the right software and systems, designing your pricing model, and creating a marketing plan — all the way to helping you secure your first clients. Whether you want to manage your own rentals or launch a full-service STR management company, we can help you build a profitable, scalable operation from day one.