Investment income offset by depreciation loss

Tax, SDIRAs & Cost Segregation
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Investment income offset by depreciation loss

Dan Ikon
Rental Property Investor · Member since 2025 · 85 posts · 35 votes

An investor considers acquiring a short-term real estate to offset his investment income by depreciation loss. Is it a valid option?

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
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Quote from @Dan Ikon:

An investor considers acquiring a short-term real estate to offset his investment income by depreciation loss. Is it a valid option?


Acquiring a business (and STR is a business, not an investment) for tax purposes is not the line of thinking I can endorse. It should be acquired for other reasons, in my opinion, with taxes merely being a side benefit.

That said, if he qualifies for STR tax benefits - which is trickier than it often seems - then he can offset any type of income. He must also understand that this is a single-year tax relief, not continuous.

Have him read this: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

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  • Dan Ikon
    OP
    Rental Property Investor · Member since 2025 · 85 posts · 35 votes
    1y
    Quote from @Dan Ikon:

    An investor considers acquiring a short-term real estate to offset his investment income by depreciation loss. Is it a valid option?


    He will be a material participant
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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    1y
    Quote from @Dan Ikon:

    An investor considers acquiring a short-term real estate to offset his investment income by depreciation loss. Is it a valid option?


    Acquiring a business (and STR is a business, not an investment) for tax purposes is not the line of thinking I can endorse. It should be acquired for other reasons, in my opinion, with taxes merely being a side benefit.

    That said, if he qualifies for STR tax benefits - which is trickier than it often seems - then he can offset any type of income. He must also understand that this is a single-year tax relief, not continuous.

    Have him read this: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

    4Reply
  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 906 votes
    1y

    Yes, it’s a valid option — but with important conditions.

    If the investor materially participates in the short-term rental (STR), and the average stay is 7 days or less, the activity can be treated as non-passive. This means depreciation losses — including from cost segregation — can offset other income like W-2 wages or business income.

    To qualify, one common way is the 100-hour test: the investor must spend at least 100 hours on the STR and more than anyone else. This is one of several IRS material participation tests, but it's the most commonly used for STRs.

    So yes, it’s possible — just make sure the investor meets the requirements and keeps good records.

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  • Julius VincentBusiness Member
    Tax Strategist | CPA, MBA + Wharton FP&A | CFO-Level Planning · Houston, TX · Member since 2025 · 157 posts · 172 votes
    1y

    Hey @Dan Ikon - Just to add...if the goal is to offset investment income, it’s important to note that “investment income” like interest, dividends, and capital gains is generally portfolio income and not automatically offset by passive losses. That’s why STRs can be so powerful. If you meet the material participation test (e.g., 100 hours and more than anyone else), the losses are treated as non-passive and can offset W-2, business, and yes, portfolio income as well.

    Also worth planning for: cost seg + 100% bonus depreciation in 2025 can create a huge first-year deduction, but after that, annual depreciation drops sharply, so I'd make sure the deal still makes sense beyond the initial tax play.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
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    A STR if considered active can offset other forms of income such as wages, interest, dividends, etc.

    There will be work required on the part of the 'investor'. 
    The thing is that a STR that is being treated as active instead of passive isin't necessarily an 'investment', but moreso a business.

    He should have a good understanding of what is required.

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  • Kevin Aumack
    Glassboro, NJ · Member since 2025 · 37 posts · 13 votes
    1y
    Quote from @Dan Ikon:

    An investor considers acquiring a short-term real estate to offset his investment income by depreciation loss. Is it a valid option?


    Hi Dan,

    A short-term rental can generate losses to offset other investment income, but that depends on meeting IRS material participation tests. Actively managing the property may allow it to qualify as a trade or business, unlocking deductions. Consider the time and effort required, opportunity costs, and depreciation recapture when you sell. A 1031 exchange can defer those taxes, but they will come due eventually.

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  • Rohullah Sharifi
    Dr · VA · Member since 2025 · 154 posts · 34 votes
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    short term rental is "non-passive income" conditioned that the owner participate materially to qualify. Sometimes people misuse it, even though with high W2 income, 1099 income, but this can be an "audit lottery" to play. Otherwise, well managed books and accounts won't be a problem and benefit the investor.

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  • Salim OmarBusiness Member
    Member since 2024 · 4 posts · 2 votes
    1y

    Yes, acquiring a short-term rental can potentially be used to offset other investment income through depreciation, but there are a few important conditions and considerations:

    • Average Stay Requirement: To qualify as a short-term rental for tax purposes, the average period of customer use should be 7 days or less.

    • Material Participation: To treat losses as non-passive (so they can offset other income), you must materially participate. This usually means:

      • 100+ hours of involvement, and no one else spending more time than you, or

      • 500+ hours of involvement during the year.(do not have o worry about others involvement)

    • Depreciation & Cost Segregation: You may accelerate deductions by doing a cost segregation study, which front-loads depreciation in the first year. This can generate large paper losses initially.

    • Future-Year Impact: Keep in mind that depreciation deductions will be much lower in subsequent years. If your income increases but your depreciation cushion decreases, you could end up in a higher marginal tax bracket in later years.

    In short, this strategy can work, but it requires careful planning around the average stay, your level of participation, and the long-term tax effects of accelerated depreciation.

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  • Rohullah Sharifi
    Dr · VA · Member since 2025 · 154 posts · 34 votes
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    everything as its pros & cons. some taxpayers, beside having FT job, side income through 1099, still claim STR. This is an "Audit Lottery" playing.

    However, if material participation test meets, then, it's a handy tool to use for tax planning and benefits.

    I would say even better the LTR.

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