Short-term rentals get special treatment in the tax code. If your average guest stays seven days or fewer, the IRS does not treat the property as a regular rental for the passive loss rules. If you also materially participate, meaning you are hands-on, the losses can offset your W-2 income without you being a full-time real estate professional. Check where you stand.
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The two tests
1. The average stay
Average stay is total nights divided by the number of bookings. One 30-day stay can pull the average above seven. Stays averaging 8 to 30 nights only count as a business if you provide significant personal services, the way a hotel does. Over 30 nights it is an ordinary rental.
2. Material participation
The two tests that matter most for an Airbnb owner are more than 500 hours in the year, or more than 100 hours and at least as many hours as any other individual who works on the property, cleaners and managers included. Your spouse's hours count toward yours. Time spent as an investor, such as reviewing financial statements, generally does not.
Keep a time log
Dates, tasks, and minutes, written as you go. An estimate rebuilt after the fact is weak, and the log is your audit defense.
What else to know
- Short-term rentals depreciate over 39 years when most guests stay 30 days or less, which is why a cost segregation study matters even more. Estimate it with the cost segregation calculator.
- Even qualifying losses are capped by the excess business loss limit, roughly $600,000 for married couples, adjusted every year.
- In Louisville, short-term rentals have to be registered, and some need a conditional use permit. Check with the short-term rental rules checker and read the short-term rental guide.
- Run the income side with the revenue calculator, and read the best practices guide.
Frequently asked questions
Can a property manager ruin material participation?
It can. If a manager or cleaner works more hours than you, the 100-hour test fails unless you clear 500 hours or meet another test.
Do I need real estate professional status for an Airbnb?
No. The short-term rental rule works separately. It is one of the two main paths to using rental losses against other income.
What about midterm rentals?
Stays of 30 days or longer are ordinary rentals, so the 7-day rule does not apply. See the real estate professional checker.
Is this tax advice?
No. Winner Realty is a real estate brokerage, not a CPA firm. Confirm everything with your own CPA.