Is it possible to deduct short term rental losses from earned income?

Question

I heard that there's a way to deduct short term rental losses against earned income (e.g. W2 income). How can this be accomplished the right way such that it doesn't raise red flags from the IRS?

Josh L. · Answer

@Santos Lopez good question. One thing to add to @Michael Plaks great linked post (read it; seriously) I’d add is to make your hour logs contemporaneous. The IRS (and courts) prefers evidence created when the work actually happens, not a spreadsheet reconstructed months later. Document your hours as you go, either in a simple spreadsheet, with detailed notes, or using an app that timestamps entries to show they were not created retroactively.

Basit Siddiqi · Answer

It is possible to have a short-term property be treated as active instead of passive if you materially participate and the average stay is 7 days ot less.Best of luck!

Basit Siddiqi · Answer

It is possible but it will be difficult if you had one stay at 150 days.

Let's say the property is vacant for 76 days and the remaining 140 days have various stays between 1 and 7 days.

Let's say you had
one 150 day stay
Five 1 day stays
Five 2 day stays
Five 3 day stays
Five 4 day stays
Five 5 day stays
Five 6 day stays
five 7 day stays

Your average would be 8.055 which would be above 7

So its possible but you likely need to fill the rest of the year with many short term visits.

Rohullah Sharifi · Answer

This represents a gray area within the Internal Revenue Code, where taxpayers are currently able to realize certain benefits under the existing interpretation of the law.

Ashish Acharya · Answer

@Santos Lopez,

Absolutely. You can offset W2 income with STR losses if the activity is nonpassive and you materially participate. Keep the average guest stay at 7 days or less. Or at 30 days or less with significant services.

• Meet a material participation test such as 500 hours or at least 100 hours and more than any other person.
• Keep a real time log of your work and bookings.
• Use Schedule E if you do not provide hotel level services.
• Use Schedule C only if you do and be aware of self employment tax on profit.
• Check the section 461 excess business loss rule. Place the property in service and meet material participation before doping the cost segregation. Document the average stay each year and keep clean books. Do not group STRs with LTRs or REPS.

Aaron Zimmerman · Answer

Yes. But there's a lot of pitfalls. My colleagues have done a great job above explaining the requirements.

To add, you need to know the hours that count and don't count for the purposes of material participation. You will also need to keep track of other people's hours too if you use the material participation test "100 hours and more than anyone else's time".

There is no true way to know if you'll be audited but having the right documentation just in case is absolutely crucial to maintain your deductions. If you follow everything the right way, you should be fine in the event of an audit.

Sean O'Keefe · Answer

Yes, it’s possible, but you need to meet the IRS requirements.

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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.

Ryan Carriere · Answer

Absolutely! The STR tax strategy has 2 main components:

1) The average stay per guest is 7 days or less for the tax year.

AND

2) You materially participate in your STR. The most common test used is the 100 hours and more than anyone else test.

For example, if you acquired a $500,000 STR after January 19th, 2025, you could accelerate $100,000 of losses with the help of a cost segregation study. If you're in the 35% tax bracket, that could equate to $35,000 in federal tax savings!

Is it possible to deduct short term rental losses from earned income?

Is it possible to deduct short term rental losses from earned income?

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