The short-term rental tax loophole

If you've heard about the STR loophole,
here's the actual math at your tax bracket.

Most short-term rental loophole content runs on someone else's numbers. This tool runs on yours — your filing status, your state, your salary, your participation hours. See whether a short-term rental actually generates enough year-one paper losses to dent your tax bill.

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01How it works

The loophole in 90 seconds

You buy a rental property. The IRS lets you deduct depreciation — a paper expense that lowers your rental income on the books without costing cash.

The catch. Rental losses are "passive" by default: they offset other rental income, not your salary. A $25,000 special allowance phases out between $100,000 and $150,000 of household income; above that, ordinary rental losses can't help your paycheck tax.

The exception. If guests stay seven days or fewer on average, the IRS treats the property as a small business. Add 100+ hours of your own time (more than anyone helping), and the losses now offset salary, dollar for dollar.

The amplifier. Cost segregation reshuffles depreciation into shorter-life parts. Layered onto 100% bonus depreciation (permanent post-January 19, 2025), one property can throw off a six-figure first-year paper loss — tens of thousands off the tax bill at a high-earner bracket.

For tax pros: Treas. Reg. §1.469-1T(e)(3)(ii) (seven-day carve-out) + §1.469-5T (material participation). Separate from §469(c)(7), the Real Estate Professional rule. Plain-language entries in the glossary.

02Worked example

What it looks like at your bracket

A worked example for a real scenario the tool models in full. Your numbers are unique; this is just to show the shape of the math.

Illustrative scenario. Your numbers will vary. State conformity to bonus depreciation, your actual participation hours, your specific filing status and MAGI, and the property's specific cost-seg study output all change the math. This is a worked example, not advice.

Property

Beach condo · short-term rental

$650,000 · 20% down · 7% / 30-yr

Taxpayer

Married couple · Florida · $400K salary

Avg guest stay 5 days · 200 hrs participation

Year 1 — the loophole pays out

Paper loss (cost-seg + bonus dep)

$155,000

Top tax rate

32.0%

32% federal · Florida has no state income tax

Result

Year-1 tax savings

+$49,600

In a handful of states that don't follow the federal bonus-depreciation rules — California, New York, New Jersey, Pennsylvania, and Maryland are the big ones — state savings on the bonus portion are $0, and the first-year win drops correspondingly. The tool models that state by state.

10-year after-tax annualized return — rental vs. the index

Short-term rental with the loophole

14.2%

S&P 500 buy-and-hold

7.8%

Both numbers are after taxes — federal capital-gains tax, state tax, the 3.8% net-investment-income surtax, and (for the rental) the recapture you owe at sale on all that depreciation you took along the way. Same starting equity, same hold period, same tax bracket.

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03Where it breaks

The catch

The loophole is real but narrower than most TikToks suggest. The four most common failure modes:

The vacation-home cap

If you also use the property yourself — for more than 14 days, or for more than 10% of the days it was rented — the IRS caps your deductions at the rent it brought in. No paper loss flows to your salary. A lot of "short-term-rental for tax savings" plans break here without anyone noticing until tax-filing time.

Material participation isn't honor-system

"One hundred hours and more than anyone else" sounds easy. In an audit, the IRS asks for a contemporaneous log of every hour. If your cleaner, property manager, or co-host worked more hours than you did, the activity flips back to passive and your losses are stuck — they carry forward, but they no longer cancel out your salary tax.

A few states don't follow the federal bonus-depreciation rules

California, New York, New Jersey, Pennsylvania, and a few others tax the bonus-depreciation portion as if you hadn't taken it. State savings on that piece are zero in those states. Federal savings are still real, but the combined-rate math comes down.

The taxman gets paid back at sale

When you eventually sell, the IRS makes you pay back tax on much of the depreciation you took — at higher rates than the original deduction saved you. This is called "depreciation recapture" and it can eat much of the first-year win. The standard ways to avoid it: roll the proceeds into a replacement property (a "like-kind exchange," sometimes called a 1031), or hold the property until death so heirs inherit it at current market value with the recapture wiped out. The tool models all three exit paths.

Long-term rental, not short-term?

The loophole doesn't apply, but a rental can still beat the index

If you don't want to babysit guests and your tenants will stay longer than seven days, the seven-day carve-out doesn't help — you can't use rental losses to offset salary income above $150,000 of household income. But long-term rentals still work as tortoise-style wealth-building: tax-free cash flow during the hold, forced equity buildup as the tenant pays down the loan, and modest appreciation. Different pitch, different audience.

See the long-term-rental math →

04About this tool

Built by a 2-person team who wants objective, cold, hard math.

We don't sell properties. We don't sell courses. We don't take referral fees. The output is one printable page you can take to your accountant — not a buy / no-buy verdict. The model handles passive-loss rules, the short-term rental loophole, the real-estate-professional rule, cost segregation, bonus depreciation, vacation-home limits, the three main exit strategies (sell, like-kind exchange, hold to inheritance), and a side-by-side after-tax comparison against an S&P 500 index fund held over the same number of years.

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