03/04/2026
Short-Term Rentals—Careful Here 🏡
In today's world, being the first to deliver news is crucial for achieving viral status on social media. Unfortunately, there is so much misinformation on Short-term Rentals because “TikTok Tax Gurus” or “IG Tax Bros” oversimplify a very complex tax strategy. This results in a significant increase in audits.
Let’s start by establishing what Short-Term Rentals are.
Short-term rentals are accommodations that are rented out for brief periods, typically ranging from a single night to a few weeks. These rentals can include various types of properties such as apartments, houses, condos, and even unique spaces like treehouses or yurts. Popularized by platforms like Airbnb and Vrbo, short-term rentals offer an alternative to traditional hotels, often providing more space, amenities, and a home-like experience. One thing, I want to point out is that there is nothing in the tax code with the word “Short-Term Rental”.
Now, we move on with Internal Revenue Code Section 469 1 📑
A wide overview of section 469 defines what passive activities are, limits how much you can deduct losses and credits from "passive activities" in a given year. These are activities where you don't materially participate, like rental properties. Generally, losses can't offset your other income, but there are exceptions.
We have to analyze two parts of this code section:
• Reg. Section 1.469-1T(e)(3)(ii)(A) 2 📑
The average period of customer use for such property is seven days or less
So, if you own a rental property for which the average rental period is seven days or less for the year, your rental activities are considered non-passive.
• Reg. Section 1.469-5T(a) Material participation
There are seven material participation test3 📑
, but you only need to meet one of the seven tests to substantiate that you’ve reached that level.
Once you have met these 2 criteria, it is by definition your rental activities are non-passive and you can use the losses generated from your Short-Term Rental and you are no longer subject to passive loss limit4 📑
So, you might think how Cost Segregation can turn my rental into a cash cow? You’re probably thinking it’s too good to be true.
Well, it isn’t! You can get this cash infusion with a cost segregation study on your rental property thanks to tax reform. By accelerating your depreciation deductions, you will supercharge your rental losses and put more after-tax cash in your pocket today.
Tax Reform Bonus