How can I deduct my short term rental losses against my W2 income? I materially participate in the rental and the average stay is less than 7 days.

[CesarJ]

To enter your short-term rental with material participation in TurboTax Online 2025 and potentially deduct losses against your W-2 income, follow these steps:

1. Go to the Federal section and then select Wages & Income.
2. Scroll to Rental Properties and Royalties (Schedule E) and select Start or Revisit.
3. Enter your rental property details and income.
4. When asked about your participation, indicate that you materially participate in the rental.
5. Provide details on rental use, including your average stay being less than 7 days.

TurboTax will then classify the rental properly and calculate allowable losses, which may offset your W-2 income.

[amber-crockett]

Thank you! I’ve tried following the steps you outline but turbo tax seems to think I can only deduct these losses as a real estate professional. I did not spend 750 hours and this is not my only job but I do qualify under material participation rules. Any ideas on how to trigger questions on material participation? 

[RogerD1]

If you actively participate in the rental activity up to $25,000 in losses can offset your other income, provided your income is $100,000 or less.  As income increases above $100,000, the maximum deduction amount is phased out until it is disallowed at incomes of $150,000 or above.

The IRS rules for material participation are spending 500 hours a year on the activity (roughly 10 hours a week), or greater than 100 hours per year, provided no one else works more than you do.  If you don't spend more than 500 hours per year on the rental, you can still be considered a material participant if you provide substantially all the work.  You also should be keeping a log of the time you spent on the rental.  If material participation looks like it will work for you and you provide "hotel-like" services for your guests, you could report this income as material participation on a Schedule C and that will allow you to claim annual losses for a short term rental with an average stay of 7 days or less on your tax return.  A possible downside is that Schedule C income is subject to the self-employment tax - but only on profits.

[AmeliesUncle]

TurboTax is NOT set up for that (assuming "services" are not provided to the tenants).

If you use the desktop/downloaded version, you can go into the "Forms", then "Schedule E Wks" and then manually check the box for "other non-passive exception (box "G"???).

Otherwise, you'll need to find different software that is actually set up for this somewhat common situation, or go to a good tax preparer.

[taxmodern]

4. When asked about your participation, indicate that you materially participate in the rental.
5. Provide details on rental use, including your average stay being less than 7 days.

TurboTax will then classify the rental properly and calculate allowable losses, which may offset your W-2 income.

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@CesarJ Unfortunately, that doesn't seem to actually exist in the software.   That would be big news if that actually worked in TurboTax online now.  But unfortunately, it doesn't. Just to be sure, I went through and attempted to edit a current rental, and I even added a new rental just to make sure I didn't miss anything.  TurboTax Online doesn't ask anything about material participation (except for real estate professionals) or the average stay being less than seven days.   So it still doesn't have the ability to correctly handle classifying short-term rental income as non-passive.  And it still doesn't use the correct 39-year depreciation for short-term rental assets either. 

The only way to make a short-term rental with material participation non-passive in TurboTax 2025 is to use TurboTax Desktop and go to Forms mode to make the changes there.