str loophole for long term rental income

Member since 2023 · 2 posts · 0 votes

I'm confused about the Short term rental loophole. If my STR property qualifies for the STR loophole then can my long term rental property deductions then be brought over to offset my active income like being a real estate professional?

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

Quote from @Justin Ward:

No. The STR loophole is, as its name says, for STRs. Does not change anything related to your LTRs.

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Kelly O'Keefe
Accountant · NC · Member since 2023 · 123 posts · 163 votes
2y
@Justin Ward
To be considered by IRS as a short-term rental and get the tax benefits you must meet the following requirements (defined by Treasury Regulation Sec. 1.469-1T(e)(3)(ii)(A))
- The average period of customer use is 7 days or less
- The average period of customer use is 30 days or less. (Confusing we know, this means that not only does the customer stay for 7 days or less on avg. they also don't come back multiple times during the year for separate trips and these stays add up to > 30 days -> Trip one: 7 days, Trip two: 7 days, etc.)
- Personal use of the property cannot be 15 days or more OR more than 10% of the total rental day
In order to offset income and be considered a Real Estate Professional you must have Material Participation, which has a few tests.

Spend more than 500 hours on the short-term rental business.
- Do substantially everything for the short-term rental business.
- Spend more than 100 hours on the activity, with no other individual surpassing your time commitment.
- Engage in a significant participation activity for more than 100 hours, with your combined activity in all significant participation activities exceeding 500 hours.
- Participate in the business for five of the previous 10 taxable years.
- Engage in a personal service activity (non income-producing) for three of the previous taxable years.
- Demonstrate regular, continuous, and provable participation in the business for more than 100 hours.
If these benchmarks are met then your income would no longer be considered passive but active and any losses could then be used to offset other active income

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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
2y
Quote from @Justin Ward:

I'm confused about the Short term rental loophole. If my STR property qualifies for the STR loophole then can my long term rental property deductions then be brought over to offset my active income like being a real estate professional?
No. The STR loophole is, as its name says, for STRs. Does not change anything related to your LTRs.
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Nate MeekerBusiness Member
Real Estate CPA | California · Member since 2020 · 543 posts · 251 votes
2y
@Justin Ward - You might be thinking that a qualifying real estate professional may elect to aggregate their rentals. Any nonrental activity is not included in the grouping, and thus the hours spent in the nonrental activity do not count toward material participation. In Bailey vs. Commissioner one of the rental activities included in the taxpayer's grouping election was like an STR, which removed the activity from the definition of a rental activity under Sec. 469. The Tax Court held that the hours spent in that activity could not be counted toward the taxpayer's material participation in his rental activities.
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David Orr
Accountant · Austin, TX · Member since 2016 · 72 posts · 72 votes
2y
Quote from @Kelly O'Keefe:
Personal use of the property cannot be 15 days or more OR more than 10% of the total rental day
I like that Kelly mentioned limiting your personal use of the property as one of the qualifications of the STR loophole. That's not usually mentioned as one of the qualifications, but it is good to be aware that if your personal use of the property is over the limit, then you can can't use it to create a tax loss, so the STR loophole wouldn't work.

But I would rephrase it because the "OR" in the sentence would make me think you can't have 15 days of personal use in any case. I would maybe rephrase it as "personal use of the property cannot be more than the greater of 14 days or 10% of the total rental days". That's still kind of a confusing sentence, but the point is that if you rented it out at least 140 days in a year, then you can use the 10% of the rental days number as your maximum personal use days.

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Tax Modern - Tax prep/advising for rental real estate owners
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Justin Ward
OP
Member since 2023 · 2 posts · 0 votes
2y
Thank you everyone for the clarification.
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Kelly O'Keefe
Accountant · NC · Member since 2023 · 123 posts · 163 votes
2y
@Justin Ward Hopefully it helps!
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Sean O'KeefePro Member
CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votes
2y
Quote from @Kelly O'Keefe:

@Justin Ward Hopefully it helps!

Tough to beat this answer from @Kelly O'Keefe
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
2y
No,
You will have one property that will continue to be 'active/non-passive' and another property that will be passive.
You can't group them together to make them both active.
Best of luck.
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Larry Vinz
New to Real Estate · Gilbert AZ · Member since 2023 · 2 posts · 0 votes
2y
Quote from @Kelly O'Keefe:
@Justin Ward

Spend more than 500 hours on the short-term rental business.
Do substantially everything for the short-term rental business.
Spend more than 100 hours on the activity, with no other individual surpassing your time commitment.
Engage in a significant participation activity for more than 100 hours, with your combined activity in all significant participation activities exceeding 500 hours.
Participate in the business for five of the previous 10 taxable years.
Engage in a personal service activity (non income-producing) for three of the previous taxable years.
Demonstrate regular, continuous, and provable participation in the business for more than 100 hours.

If these benchmarks are met then your income would no longer be considered passive but active and any losses could then be used to offset other active income
Against the material participation criteria, do all points need to be met? I'm specifically wondering about the bolded items above that mention having to be involved in 5 of the past 10 years. This would mean that I cannot materially participate until I've had a STR for 5 years? Do you need to meet all of the criteria or just spend more than 500 hours?
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Kelly O'Keefe
Accountant · NC · Member since 2023 · 123 posts · 163 votes
2y
@Larry Vinz
You only need to meet one of the tests. Generally, the first three are the most common tests claimed. I would also highlight that you need to be able to show your participation and substantiate it if necessary.
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Larry Vinz
New to Real Estate · Gilbert AZ · Member since 2023 · 2 posts · 0 votes
2y
Thank you @Kelly O'Keefe! Makes my goals for 2024 more of a reality. I do realize that proof is critical to showering participation. Thanks again.
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Kelly O'Keefe
Accountant · NC · Member since 2023 · 123 posts · 163 votes
2y
Happy to help @Larry Vinz. Good luck on your 2024 goals and let the forum know if you have anymore questions
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