What is the Short Term Rental Tax Loophole?
The short term rental loophole has saved people thousands of dollars a year in taxes because it doesn’t require you to be a real estate professional. It can be found in the tax code under Reg. Section 1.469-1T(e)(3)(ii)(A), and defines exceptions to the definition of “rental activity”.
We mentioned before that earning a real estate professional status is one way to turn losses on rental properties. However, this isn’t typically an option for highly paid professionals like doctors or lawyers, because they don’t have half of their working time to work in a real estate business. The good news is that the short term rental tax loophole can help.
The exceptions to the definition of rental activities in the tax code listed above can also turn losses non-passive if you, the short term real estate investor, meet one of seven material participation criteria. These tests will determine whether you qualify based on your use of and involvement in your short term rental property.
Here they are:
- Spend more than 500 hours on the short term rental business
- Do substantially everything for the STR business
- Spend more than 100 hours on the activity and no one other individual spends more time than you do
- Significant participation activity for more than 100 hours, and your combined activity in all significant participation activities exceeds 500 hours
- Participating in the business for five of the 10 previous taxable years
- Personal service activity (non income-producing) for three of the previous taxable years
- Regular, continuous, provable participation in the business for more than 100 hours
The first three are the ones the majority of short term real estate investors qualify for.
Once you meet one of these tests, and your short-term rental is excluded from the definition of a rental activity, then it is considered non-passive.
