The above link breaks down some scenarios for tax breaks with a STR - the key takeaway was you can use depreciation against rental income to create paper loss to offset active income as long as you have material participation and guests rent the property for 7 days or less at a time.
Below you'll find further details from the article link above.
"Exception #3: The Short-term Rental
The short-term rental exception (see 1.469-1T(e)(3)(ii)) says if your average rental period equals seven days or less, tax law doesn’t limit your losses.
Example: You buy a Montana log cabin late in the year, get it furnished, and then sign up for a couple of the short-term rental websites. During November and December, you rent the property for a week three different times. Your rental activity averages 7 days and therefore isn’t limited by the passive loss limitation rules.
If you do your depreciation in a way that puts a $63,000 deduction on your tax return? Bingo. You may shelter $63,000 of income without needing to worry about having passive income or middle-class income or qualifying as a “real estate professional.”
Just to play with the numbers so you see how powerful this is, you could use the vacation rental tax shelter to put a big deduction on your tax return every year.
Recycling the example presented earlier, if you purchased a vacation rental every year, you would drop a $63,000 deduction onto your tax return every year.
And by the way? If you wanted to really jack your depreciation deductions? Sure, you can scale. Ten vacation rentals might produce a $630,000 deduction. A hundred vacation rentals? Well, you do the math…
Achieving Material Participation
One other important wrinkle you need to know about.
You can also lose your ability to deduct losses–even losses on short-term rentals–when you lack material participation in the activity. Accordingly, you need to materially participate in the short-term vacation rental activity.
You can achieve material participation in a variety of ways. But typically, you have three practical options:
You or your spouse spend more than 500 hours a year.
You or your spouse spend more than 100 hours a year and no one else spends more hours.
You or your spouse is the only person who substantially participates in the activity.
Let me provide examples so you see how this works.
Example 1: You do all the marketing, housekeeping and landscape maintenance. All totaled, this activity only adds up to 40 or 50 hours a year. However, because no one else does more work than you do, your participation counts as “material” even though the total hours over the year are modest.
Example 2: Your spouse spends about a 120 hours over the course of the year renting or trying to rent a vacation home. You guys use two housekeepers: Mary and Margaret. Mary spends about 80 hours over the course of the year. Margaret spends about 100 hours. Nevertheless, your participation counts as “material” because your spouse spends more than 100 hours a year and no one else (neither Mary nor Margaret for example) spends more hours.
Example 3: Same facts as example two except Margaret retires and Mary picks up all of the housekeeping. This means your spouse spends 120 hours a year while Mary spends 180 hours a year. In this case, your participation does not count as “material.” With Mary spending 180 hours a year, you or your spouse would need to spend more than 180 hours a year.
Example 4: Your property is rented nonstop through the year. As a result, your housekeeper, reliable Mary, spends about 1000 hours a year cleaning and washing. The heavy rental use also requires you to hire another worker who does repairs and landscape maintenance—work that he also spends about 1000 hours a year doing. In this case, you need to spend more than 500 hours a year in order to participate on a material basis."
Accountant · Hunt Valley, MD · Member since 2016 · 49 posts · 17 votes
4y
Please be aware that there is a difference between 2nd home and STR. And depending on certain factors one may be more advantageous for you than the other.
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