What if we told you that you could earn tens (or hundreds) of thousands of dollars from your short-term rentals — and legally pay zero in federal income taxes?
It’s not clickbait. It’s the STR loophole, and it’s one of the most powerful (and misunderstood) tax strategies in real estate.
Unlike long-term rentals, short-term rentals (STRs) fall into a unique tax category — one that, when used right, can allow you to take big write-offs without needing Real Estate Professional Status (REPS).
Let’s break it down in plain English.
The STR loophole refers to a tax classification where short-term rentals are not treated as passive income, even if you’re not a full-time real estate professional.
That’s because under IRS rules, short-term rental income is considered active if the average guest stay is seven days or less, and you materially participate in the business.
If both are true, you may be able to:
This opens the door for high-income earners (like doctors, lawyers, tech professionals, etc.) to significantly reduce their tax bills through real estate — without quitting their jobs.
Here’s what matters in tax code terms:
It’s this exception that makes the “loophole” work.
“If the average period of customer use of the property is seven days or less, it is not treated as a rental activity under Section 469.” — IRS Code
In other words: STRs can be treated more like active businesses (hotels) than passive investments (long-term rentals).
To benefit from this loophole, you still need to show that you’re materially participating in the STR.
The IRS has seven tests for this. Most STR hosts qualify under these two:
You participate in the STR activity for 500+ hours during the year.
You work 100+ hours AND no one else (including a property manager or co-host) does more.
You don’t have to hit both — just one.
✅ Good example: You manage your STR directly — handle cleanings, guests, walk-throughs, design, or maintenance coordination.
❌ Bad example: You hire a full-service property manager and don’t lift a finger. That’s passive.
Let’s say you earn $250,000 from your job.
You buy a $700,000 vacation rental in St. Augustine, Florida. You:
Cost Seg study yields $120,000 in year 1 depreciation (thanks to bonus depreciation rules).
You report a $120,000 “loss” — even though the property cash flowed $30K.
Your net income drops from $250K → $130K
You save ~$40,000 in federal taxes, just by leveraging this strategy.
| Feature | STR Loophole | REPS |
| Average Guest Stay Requirement | Yes – Under 7 days | No |
| Material Participation Required | Yes | Yes |
| 750-Hour Rule | No | Yes |
| Must Be Full-Time in RE | No | Yes |
| Offsets W-2 or Active Income | Yes | Yes |
| Easier to Qualify for Most | ✅ YES | ❌ Harder |
In short, the STR loophole is the easier, more accessible version of REPS — but only for short-term rentals.
A cost seg study breaks down your property into parts — land improvements, appliances, fixtures, etc. — and accelerates depreciation on them.
In 2025, bonus depreciation is still available at 60%, which means:
This $90K can offset active income if you qualify under the STR loophole — which is why cost segs + STRs are a dream combo.
👉 We’ve partnered with top firms to offer STR-optimized cost seg studies. Learn more here.
Yes, the STR loophole is legal. But it can raise audit flags if you’re not careful.
Here’s how to stay clean:
✅ Keep a detailed time log — Google Calendar, Excel sheet, or a time-tracking app
✅ Document all activities — design planning, messages, vendor coordination, etc.
✅ Use separate bank accounts for your STR
✅ Work with a STR-savvy CPA
✅ Don’t “double dip” deductions (especially on personal use)
🛑 Pro tip: If you stay in the property yourself, be sure to adjust depreciation and deductions accordingly.
If a PM handles most of the work, you likely won’t qualify for material participation — and the STR loophole won’t work for you.
However, if you:
…you may still qualify.
Many investors take back control for Year 1 to get the write-offs, then switch to full-service once the depreciation is used up.
✅ High W-2 earners looking to reduce taxes
✅ First-time STR investors planning to self-manage
✅ Couples where one spouse doesn’t work and can run the STR
✅ Business owners with active income
Even one STR — used strategically — can generate $50K+ in paper losses that lower your overall tax burden.
The STR loophole is one of the most underrated tax tools in real estate — especially for busy professionals who don’t have time to qualify for REPS.
If you:
…you could legitimately offset W-2 or active business income without becoming a full-time real estate pro.
That’s the power of understanding your tax code — and playing it to your advantage.
At Deal Room, we help STR investors:
👉 Download our free STR Loophole Checklist
👉 Book a tax strategy consult
Deal Room is your trusted source for smart, actionable insights in rental property investment and management. From financing and tax strategies to design and operations, we help landlords and investors make confident, informed decisions.
The best Depreciation Strategies, Tax Savings content from across the internet in your inbox every week.
