Short Term Rental Tax Loophole in California
Member since 2026 · 3 posts · 3 votes
Short Term Rental Tax Loophole in California
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Aaron ZimmermanBusiness Member
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votesWhen buying property in California or places with high land value, you need to be aware of the what your ultimate building value will be. for instance, on a $1M purchase, you may have $500k that's land and $500k building. Then, you can accelerate depreciation on a portion of the building portion so I'd recommend seeing if it's still worthwhile from a tax perspective.
Also - material participation is incredibly important. I'd recommend having your cpa review your hours AND it is likely you'll need to keep track of all hours worked by any individuals that worked on your property.
Brick House CPAs53 Reviews
19 Replies
- 3moAaron ZimmermanBusiness MemberAccountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
When buying property in California or places with high land value, you need to be aware of the what your ultimate building value will be. for instance, on a $1M purchase, you may have $500k that's land and $500k building. Then, you can accelerate depreciation on a portion of the building portion so I'd recommend seeing if it's still worthwhile from a tax perspective.
Also - material participation is incredibly important. I'd recommend having your cpa review your hours AND it is likely you'll need to keep track of all hours worked by any individuals that worked on your property.
Brick House CPAs53 Reviews- Accountant · Long Island, NY · Member since 2021 · 184 posts · 148 votes3mo
Quote from @Aaron Zimmerman:
When buying property in California or places with high land value, you need to be aware of the what your ultimate building value will be. for instance, on a $1M purchase, you may have $500k that's land and $500k building. Then, you can accelerate depreciation on a portion of the building portion so I'd recommend seeing if it's still worthwhile from a tax perspective.
Also - material participation is incredibly important. I'd recommend having your cpa review your hours AND it is likely you'll need to keep track of all hours worked by any individuals that worked on your property.
@Aaron Zimmerman already hit on the first thing I was going to say.
@Andrew Steffens thanks for looping me in
In CA, it's important you are analyzing the tax assessment of each prospective property to see the building/land split. You can figure out how to do this on your own pretty easily. I won't sit here and pretend that you need to hire guys like @Aaron Zimmerman or myself to do that, but we definitely would help any of our advisory clients who want our input. Very often, certain county assessor websites are confusing to read. This is where we can help, in addition to guiding you on the actual implementation of the STR loophole of course.
BEFORE you buy the property is when the tax planning starts. On a $1million dollar purchase, a 60% land value vs. a 40% land value will provide materially different tax outcomes. Instead of running to a CPA after the purchase, loop them in before the purchase. KNOW WHAT YOU ARE BUYING.
Also, will add that regardless of the building land split, a qualified cost approach appraisal could also be used for the building/land split. Always be sure to explore that option. Any appraiser would pick up the phone and tell you if they can confidently "beat" the county assessment.
Another thing to mention... Be sure to keep the CA LLC annual fee in mind when underwriting these properties.
- 3moAndrew SteffensBusiness MemberTampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
Great advice from Aaron.
I personally use Aiola CPA / @Christopher Tile
I am in FL and a sizeable percentage of my clients are Californians. There are direct flights from SD, LA, and SF direct to Tampa and you can actually cashflow here, and get a better bang for you buck on the depreciable value. Food for thought, good luck!
Vacation Rentals of Florida53 Reviews- Member since 2026 · 3 posts · 3 votes3mo
@Andrew Steffens@Christopher Tile@Aaron Zimmerman Good advice from each of you. I think the city of Long Beach's website is quite a straightforward read but I think what isn't clear is how likely the application is to be denied or renewed.
The material participation isn't off putting to me at all and the land value I don't think would really come into it if it's a condo/apartment because it's in a building.
- CPA| New Clients Welcome| 50 States · Member since 2016 · 440 posts · 94 votes3mo
@Callum Bartlett, hi. You are considering the right factors, but I would avoid treating this as a guaranteed “loophole.” Self-management alone is not the test. Average guest stays, material participation, documented hours, personal use, and loss limitations all matter.
I would model the property as an investment first, then have a CPA review the strategy before closing. The tax benefits should strengthen a sound deal, not justify a weak one.
- 3moBradley BuxtonBusiness MemberReal Estate Agent · NV · Member since 2023 · 1k+ posts · 716 votes
Take a closer look at the law and talk with a tax strategist and CPA. You have to have a minimum of 100 hours and do the majority of the hours. I have CA clients that bought in my market (Tahoe / Reno, NV) that take advantage of the tax code to offset the their w2 and have a property manager. There are ways to fully utilize the advantages while not doing all the management yourself. The bonus depreciation is also an advantage but separate. With all the regulations and emotions surrounding the housing shortages in CA there are likely better options out of the LA area even if you remain in CA. I'm not a CPA and if you need a good one I'm happy to give some references.
- 3moJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 907 votes
You're weighing the right factors, but I'd be careful about treating this as an automatic write-off. Managing the property yourself isn't the whole test. What really matters is meeting material participation and being able to back it up with documented hours, and the average guest stay (generally needs to be 7 days or less), any personal use, and the passive loss rules all come into play. The other big piece in California is that a large chunk of your purchase price is often non-depreciable land, so pull the county assessor's building-to-land split before you buy since it's a key input into how much you can actually depreciate. That assessor number is a reasonable starting point but it isn't the final word, and a solid cost-approach appraisal can sometimes support a stronger building allocation. Do this planning before you close, not after, and don't forget to work the annual California LLC fee into your numbers. Bottom line, let the tax benefit strengthen a deal that already pencils out rather than be the only reason you buy. The exact answer depends on your specific facts, so it's worth running it by your own CPA before pulling the trigger.
Malabute & Company CPAs525 Reviews I have STRs to make money. Losing money to get tax write off on a standard depreciation model is likely not a good investment. If you add the cost seg to advance the depreciation forward, you will likely to purchase every 5 years or sooner.
Does this make sense? Buy an STR, work it at least 100 hours and more than anyone else, show a loss on that STR to write the loss off against active income.
Does this make more sense? Buy an STR that makes money letting someone else manage it?
hmmm.
for anyone who thinks I do not understand the benefit, STR owner 27 years, have done multiple cost segs, successfully intentionally minimize cash flow because of its tax consequences.Something to consider. Good luck.
- Investor · Dallas, TX · Member since 2024 · 4 posts · 5 votes3mo
@Callum Bartlett lots of good CPA input above so I'll stay out of that lane, I'm not a CPA. I build STR underwriting tools, so let me add a few things from the deal and market side, plus clear up something in this thread that might be confusing you.
First the confusion. Bradley says his CA clients use a property manager and still get the benefit. Everyone else says you have to do the majority of the hours. Both are right, they're just pointing at different tests. The 100 hour test requires you to beat every other individual's hours, including your PM and your cleaner, so a manager usually kills it. The 500 hour test has no comparison at all, you just clear 500 hours yourself. That's about 10 hours a week, every week. So a PM is possible, but you're on the harder path, and a full service PM handling pricing, guest comms and cleaning coordination makes 500 self performed hours a grind. Decide which test you're targeting before you buy, because it dictates what you're allowed to outsource.
Second, something nobody's mentioned: recapture. Cost seg typically moves 20 to 35 percent of building cost into 5 and 7 year property, and that portion recaptures as ordinary income when you sell. The remainder comes back as unrecaptured §1250 gain at up to 25 percent. So you deduct at ordinary rates now and pay a chunk back at ordinary rates later. For a high W2 earner it's largely a deferral, not permanent savings, unless you 1031 indefinitely or hold to step up at death. Dan gestured to this with the 'buy every 5 years' comment. Have your CPA model the exit, not just year one. "Unlocking a large amount of income tax" reads differently once you see it as a loan from the IRS.
Third, the Long Beach specific one, and it's the piece I'd worry about most. Non primary STR registrations there are capped at 800 citywide and roughly 695 are already in use, so you're competing for about a hundred remaining slots. The city also tightened in February 2025 with mandatory inspections and a three strikes system that can block renewal. That's a bigger deal for you than for a typical buyer, because your whole thesis depends on the property operating as a 7 day average stay STR every single year. Lose the registration and you don't just lose revenue, you lose the reason you bought it, and you're sitting on a negative cashflow asset in a very expensive market. Worth confirming slot availability before you're in contract. The primary residence path has no registration cap if house hacking is at all on the table, though un-hosted nights are capped at 90.
Net, I'd underwrite two scenarios side by side over 5 to 10 years rather than one. The Long Beach self managed deal with the year one tax win and ongoing negative cash flow, against a cash flowing STR in a market where the math works on its own. Compare them after tax and after recapture, not on the year one deduction. The year one benefit happens once. Negative cash flow happens every year and compounds. That comparison is the actual decision.
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes3mo
@Dan H.An investor does not have to actively manage a property during all years of operation of a short term rental to take advantage of accelerated depreciation the first year.
You mention that a person has to have material participation to take advantage of a cost Seg study and accelerated depreciation. Using new construction as an example , since there is no recapture of depreciation with short term rentals and material participation, participating in the construction of short term rentals in the building phase meets material participation rule.
After getting a massive write off in year one of 35-37% when the STR is put into operation in the 4 th quarter, management can be turned over to a third party in following years without losing ( recapture) of the depreciation write off in the first year.
If you switch from active management to passive management after year one the investor still is able to depreciate the property at 5-7% levels to shelter cash flow from operations.
Yes, an investor must keep their eye on the bottom line, not overspending for a property. But active management beyond the first year of operation is not necessary to use cost segregation and accelerated depreciation to offset other income.Quote from @Todd Goedeke:
@Dan H.An investor does not have to actively manage a property during all years of operation of a short term rental to take advantage of accelerated depreciation the first year.
You mention that a person has to have material participation to take advantage of a cost Seg study and accelerated depreciation. Using new construction as an example , since there is no recapture of depreciation with short term rentals and material participation, participating in the construction of short term rentals in the building phase meets material participation rule.
After getting a massive write off in year one of 35-37% when the STR is put into operation in the 4 th quarter, management can be turned over to a third party in following years without losing ( recapture) of the depreciation write off in the first year.
If you switch from active management to passive management after year one the investor still is able to depreciate the property at 5-7% levels to shelter cash flow from operations.
Yes, an investor must keep their eye on the bottom line, not overspending for a property. But active management beyond the first year of operation is not necessary to use cost segregation and accelerated depreciation to offset other income.I am unsure you tagged the right person but here are some thoughts:
- OP was explicitly asking about STR loophole (STR exclusion) and not development
- to the best of my knowledge STR depreciation recapture has same rules as LTR recapture. Your comment was likely applying depreciation to development. I do not do development but development is unrelated to STR exclusion (loophole)
- if you take 35% to 37% first year depreciation then switch to standard depreciation model you have 63% to 65% to depreciate over the next 26,5 yeasts or ~2.5%/year.
- as indicated I am unsure you tagged the right person, but in your example in year 1 you have a likely artificially high write off but subsequent years you have slightly lower depreciation write off than standard. If you are projecting a loss operating the STR after year 1 in this scenario, you likely have an STR that is loosing money (cash flow negative). Not sure why anyone wants to purchase something to lose money simply to write off that loss.
- I qualify as REP. I could easily qualify for the STR exclusion. I do not need to use either to do a cost seg as I write off against our passive earnings (the earnings I make on the RE investments). I basically use accelerated depreciation to move the depreciation deduction forward. Ideally in less than 5 years I have a new acquisition to accelerate the depreciation to minimize my income tax to keep the deductions optimized. If I stop feeding the pipeline, by year 6 my depreciation write off is less than standard deprecation. Note I aim not loosing money on my RE, not showing a paper loos across my RE investments.
I fear a lot of people looking to use the STR exclusion are purchasing STEs that lose money and I am referring to real money, not artificial paper losses. They will work at least 100 hours/year, take on the effort and risk of purchasing a property and operating an STR, to lose money to write off those real losses.
Here is an analogy, a trouble syndication is looking to liquidate prior to completion to prevent the total loss of the LPs full investment. The LPs know they will lose some of their investment (have zero chance to recover their full investment). They would be thrilled to sell for their full investment. Note the buyer will be able to write off these losses. No one buys the LPs’ shares because it makes no sense to suffer losses just to be able to write the losses off.
I fear many of the people wanting to use the STR exclusion are in effect doing the same thing as buying into the bad syndication for too high a value.
Make sure the STR is a good investment first, then consider the STR exceotion.
Good luck
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes3mo
@Efren Toscano No, depreciation is not always recaptured.
There is no Recapture of depreciation when gifting a property to a charity. If an investor builds a property for $500k in 2026 and then gifts that property to a charity 5 years later in 2031 when it’s valued at $800k, the full market value of the property is deductible( minus Debt). The investor has been able to shelter income of around 55%-60% of building value using cost segregation. There is no recapture of depreciation when gifting. The investor gets full deduction of $800k to offset other income.
- 3moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
@Callum Bartlett The STR loophole strategy is solid, but a few pieces are worth double-checking before you commit to buying in SoCal specifically. Material participation is the real qualifier, not just self-managing, you need to hit one of the IRS tests, most commonly 100+ hours and more than anyone else involved, so track those hours from day one, that's the number one thing that gets an STR loss disallowed in an audit. Average guest stay also has to be 7 days or less (or 30 with services provided) for the activity to fall under the non-passive STR rules in the first place rather than getting treated as a regular passive rental.
Given SoCal pricing, cost segregation is going to matter a lot here since that's what generates the bulk of the paper loss in year one through bonus depreciation, worth running the numbers on a specific property before you buy so you know roughly what loss you're actually unlocking against your W-2 income, rather than assuming any STR purchase gets you there. Keep in mind this only offsets your W-2 income in the year the loss is generated at that scale, if you're buying one property, that's a one-time or front-loaded benefit, not a recurring shelter unless you keep adding properties or doing renovations that generate more bonus depreciation down the line.
Happy to connect!
INVESTOR FRIENDLY CPA®5240 Reviews - Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes2mo
@Dan H.You were tagged because you made the comment that all depreciation is recaptured. That is incorrect. As I pointed out , which you elected to not respond to, gifting to charity avoids recapture of depreciation.
You also said changing from active management to passive management would change the depreciation schedule used. That is also incorrect. No one suggested changing from accelerated depreciation back to other depreciation schedules. Changing from qualifying under material participation to passive investing by turning property over to a management company does not change the depreciation schedule as you suggested.
I' m not sure why you mentioned your personal situation as the comments you made were about STR investing in general.
It is a given fact that the price you pay for a property has a direct impact on net cash flow. That is not being debated.
- 2moSean O'KeefePro MemberCPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
Quote from @Callum Bartlett:
I'm interested in using the STR tax loophole to show a paper loss to offset income tax on high W2 earnings. To access that loophole the property needs to be managed by me directly, so I'm looking to by locally in Southern California where I live. While I'm aware that this isn't the most attractive STR market due to the price of real estate and the regulations in much of LA county, it's unlocking a large amount of income tax and building equity in a real estate asset even if it doesn't generate a huge amount of cash right off the bat.
Does anyone have any experience using a similar strategy or have any recommendations for a CPA to help execute that strategy?
I’m also based in CA. Lots of good stuff in here already, @Efren Toscano's breakdown of the 100 vs 500 hour tests and the Long Beach permit numbers is genuinely the clearest explanation of that I've seen anywhere, and @Aaron Zimmerman / @Christopher Tile are right that the land/building split needs to happen before you're in contract, not after.
One thing nobody's brought up yet and it's a big one for you specifically since you're staying in CA: California doesn't conform to federal bonus depreciation. That cost seg write-off everyone's talking about is mostly bonus depreciation, and the state makes you add a big chunk of it back and depreciate straight-line instead. So you end up running two depreciation schedules, one for the federal return and one for CA, and the loss that wipes out your W2 income federally only partially follows through to your state return, where you're still paying up to 13.3%. Worth having your CPA run both returns side by side before you buy anything, because "unlock a large amount of income tax" is really more like "unlock a large amount of federal income tax."
Also, on the condo thing, I wouldn't assume land value drops out just because it's in a building. You still get allocated a land value based on your share of the lot, it's just usually pulled from the condo declaration or a cost seg study instead of reading it straight off the assessor site. And separate from the city cap @Efren Toscano mentioned, I'd get the actual HOA bylaws in hand before you get too far into this. A lot of Long Beach HOAs ban STRs outright regardless of what the city allows, and that's a much worse position to find yourself in than just missing out on one of the remaining permits.
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
- 2moJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 907 votes
The strategy is sound and you've got the key requirement right: to use those STR losses against your W2 income the average guest stay generally has to be seven days or less and you have to materially participate in running it, which is where self-managing comes in, so buying near you makes sense. The piece I'd stress is that the tax planning starts before you buy, not after. On each property only the building depreciates, not the land, so pull the county assessment and look at the land-to-building split, because on a $1M purchase a 40% versus 60% land allocation is a big swing in your first-year depreciation, especially once you layer in a cost segregation study and bonus depreciation. If the county's split is unfavorable an appraisal can sometimes support a stronger building allocation, and when you underwrite these don't forget California's $800 minimum LLC franchise tax if you hold it in an entity. The exact numbers really depend on your income and situation, so make sure you run it by a CPA before you buy.
Malabute & Company CPAs525 Reviews - 2moJulius VincentBusiness MemberTax Strategist | CPA, MBA + Wharton FP&A | CFO-Level Planning · Houston, TX · Member since 2025 · 157 posts · 172 votes
Late to this one, but one angle worth adding. There's now a whole category of done-for-you STR firms marketing directly at high W2 earners. You put in capital, they acquire, furnish, and operate the property, and they provide a framework to help you document participation hours for the loss.
So their outside help would fit cleanly on the launch side, sourcing, design, furnishing, and listing setup, while the ongoing guest-facing management stays with you. Happy to share the name of a firm in this space that does a really good job.
Horizon Wealth & Tax Advisors511 Reviews - 2moFarzana HossainPro MemberMember since 2024 · 8 posts · 1 vote
Hi Callum,
You're spot on with this strategy. For high W-2 earners, leveraging the STR tax loophole via cost segregation and material participation is one of the single best tax-sheltering moves available, even in lower-yield cash flow markets like SoCal.
My husband and I use this exact strategy ourselves on our short-term rentals and saved over $100k+ in taxes over the last two years alone.
As a licensed CA REALTOR® and active STR operator, I work with investor clients targeting this exact framework. Managing locally is crucial for meeting IRS material participation tests, but finding pockets in SoCal with favorable STR regulations (like specific desert/inland hubs vs. strict LA City limits) takes careful underwriting.
Beyond finding properties, I help clients navigate local permitting, run initial cost-seg and cash-flow analyses, handle setup and renovations, and consult on self-management systems so you hit your required hours smoothly.
I also work with real estate-savvy CPAs in California who specialize in STR cost segregation and tax execution.
Happy to get on a call to talk through market pockets, CPA recommendations, or run numbers on a few potential areas. Let me know if you’d like to connect!
- 1moBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
The interesting thing with California is that the state does not recognize Real Estate Professionlal Status but they do allow people to have a STR that is treated as active to reduce their taxable income.
Best of luck to you in your search for an accountant.
Basit Siddiqi CPA4.979 Reviews
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