The Trap in Short Term Rental Tax Strategies. When 100 hours is not always 100 hours

[Bruce D. Kowal]

Short Term Rentals and the 100 hours "trap"

The Trap in short-term rental tax strategies.

If you're a W-2 earner using an Airbnb to offset your salary, and you've hired a property manager, you need to read Treasury Regulation §1.469-5T(a)(3) very carefully. Here it is in all it's glorious perspicuity:

(3) The individual participates in the activity for more than 100 hours during the taxable year, and such individual's participation for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year;

The regulation doesn't just require 100 hours of participation.

It requires you to work at least as much as any other individual working on the property—including your property manager,.

What does this mean in practice?

==> Your manager works 120 hours? You need 120+ hours.

==> Your manager works 150 hours? You need 150+ hours.

==> You log 100 hours, manager logs 101? You fail material participation.

This is the "outwork everyone" test.

And it's where most STR tax strategies collapse under audit. The seminar promoters selling "100 hours = unlimited deductions" conveniently forget to mention this part. [Did you know this?]

The more help you hire (the thing that makes STR ownership actually sustainable), the harder it becomes to qualify for the tax benefits you were promised.

Your manager is good at their job and works efficiently? That's bad for your tax position.

This regulation makes sense from a public policy perspective:

It separates the real operators from the casual investors.

The Dilettante who drops by once a month to "check on things" while texting their property manager can't claim 100 hours and call it "material participation". Not when the manager is doing 200+ hours of actual work.

But the owner who's legitimately running the business?

The one scrubbing toilets at 11 AM because a guest checked out early and another checks in at 3 PM? The one restocking supplies, doing repairs, handling emergencies, coordinating work? That owner will naturally outwork the manager—because they're doing management work plus operational work.

The regulation rewards actual effort, not manufactured participation.

You can't be passive in reality and active for tax purposes. You can't hire someone to do the work, then claim credit for their labor by showing up occasionally.

Either you're running the business—really running it—or you're not.

The IRS doesn't care how many hours you logged if someone else logged more doing the actual work.

Documentation is everything.

The IRS won't accept a spreadsheet created in February showing you worked 150 hours the previous year. They want contemporaneous records—evidence created at the time the work was performed.

What real documentation looks like:

• Time logs showing date, specific task, and hours (kept weekly, not recreated at tax time)

• Receipts for cleaning supplies purchased the same day your log shows cleaning work

• Calendar entries blocking time for maintenance with notes on what was done

• Text messages or emails showing you personally handled guest issues

• Photos documenting before/after repair work with timestamps

The extreme but effective approach?

Wear a fitness tracker that shows elevated heart rate during your claimed cleaning hours. Or use a GoPro to record yourself performing the work.

Sounds ridiculous? Maybe. But when the IRS questions whether you really spent four hours deep-cleaning between guests, video footage of you scrubbing grout is pretty compelling evidence.

This is all pretty humorous on some level. Imagine an IRS auditor watching 100 hours of GoPro recordings, and hearing heavy breathing and grunting as you clean.  The sound track alone is X-rated.

Not sure if anyone remembers "Fawlty Towers", but I can see John Cleese frantically trying to record his hours.

The key distinction your records must prove:

When maintenance was needed, did you do it yourself? Or did you call the property manager's staff?

Your time log should reflect the work you personally performed—not work you supervised, delegated, or arranged for others to do.

The most persuasive documentation strategy:

Coordinate with your property manager to maintain a single master ledger for your unit that logs all work performed—whether by the manager's staff or by you personally.

How this works:

Before you perform any work on your unit, you check in at the property manager's office. They log: "Owner - arriving to clean unit - [time]."

When you finish, you check out. They log: "Owner - completed cleaning - [time] - [total hours]."

The property manager's ledger now shows:

• 3/15: Manager's crew - HVAC filter replacement - 1.0 hours

• 3/18: Owner - deep cleaning between guests - 4.5 hours

• 3/22: Manager's crew - landscaping - 2.5 hours

• 3/25: Owner - plumbing repair - 2.0 hours

• 3/30: Owner - restocking supplies - 1.5 hours

This creates a third-party verified record.

Your hours aren't self-reported in a spreadsheet you control. They're documented by the property manager in the same system used to track all operational work on your unit.

The verification step that seals it:

After you complete the work and check out with the property manager, they should physically inspect the unit to verify and document what was actually done.

The ledger entry becomes:

• 3/18: Owner - deep cleaning between guests - 4.5 hours - PM verified: bathrooms, kitchen, floors, linens

This adds independent confirmation.

You didn't just claim you cleaned for 4.5 hours. The property manager inspected afterward and documented the completed work.

For the IRS, this answers the critical question:

Did the owner really do the work, or just show up and claim hours?

The manager's inspection notes prove the work was actually performed—and performed to the standard required for the next guest.

Contemporaneous. Third-party verified. Inspected.

That's audit-proof documentation.

If you are getting slightly nauseous reading about this, well, then maybe AirBnb is not for you.

This is a reality check for BP Members.

So, before you file claiming "material participation":

Ask your property manager for their annual hours worked. Compare to your documented time. If you didn't outwork them, you don't qualify—no matter how many hours you logged.

The IRS wrote the regulation this way on purpose. They know what happens when investors try to have it both ways: passive ownership with active tax treatment.

Now, you may think: "No way IRS audits me".  Hey, IRS already knows you own an AirBnb by the 1099K which is issued to you. They do a simple Booolean search: Select all Taxpayers where Form 1099K exists and Schedule C line 31 and/or Schedule E line 43 is negative. Simple. You get "selected".   A letter goes out from IRS along with an Information Document Request.

Here is a US Tax Court case which goes into all the fun of Short Term Rentals.  Ronald and Mary Lucero.  From 2020.  They represented themselves before the US Tax Court.  Those are always the most "fun" to read.  

So, over this Thanksgiving weekend, take a look this case.  Enjoy, along with leftover turkey.  The link is here, and is referenced above.

https://www.taxnotes.com/research/federal/court-documents/co...