Midterm rentals, stays of 30 days or longer, are ordinary rentals for tax purposes, so the short-term 7-day rule does not apply and the losses are passive. The main way around that for a high earner is real estate professional status. Check yourself and your spouse below.
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The rules in plain English
Real estate professional status
You qualify if you spend more than 750 hours a year in real estate businesses where you materially participate, and more than half of all the hours you work are in real estate. On a joint return, each spouse is tested alone. You cannot add your hours together to reach 750. If one spouse qualifies, and you also materially participate in the rental, the rental losses can offset the other spouse's W-2 income.
Why a full-time job usually blocks it
A full-time job outside real estate is about 2,000 hours, so real estate would need more hours than the job, which is why the status usually belongs to the spouse who invests full time.
If you do not qualify
Passive losses offset passive income, or carry forward and release against future passive income or the profit when you sell. The small landlord allowance lets active participants use up to $25,000 of losses against other income. It shrinks by 50 cents for every dollar of income above $100,000 and is gone at $150,000.
Keep a time log
Dates, tasks, minutes, recorded as you go. It is the whole case if you are audited.
Related tools
- Run the revenue on a midterm with the revenue calculator.
- See the first-year effect of depreciation with the cost segregation calculator.
- Own an Airbnb instead? Use the short-term rental tax qualifier.
- Read the midterm rental guide and the best practices guide.
Frequently asked questions
Do the rules differ for long-term rentals?
No. Midterm and long-term rentals are both ordinary rentals for the passive loss rules.
Do I still have to materially participate in the rental?
Yes, unless you elect to group your rentals. Both spouses' hours count together for that part.
Is there a cap on losses?
Yes. Nonpassive losses are limited by the excess business loss cap, roughly $600,000 for married couples, adjusted every year.
Is this tax advice?
No. Winner Realty is a real estate brokerage, not a CPA firm. Confirm everything with your own CPA.