How the Strategy Works

• Short-Term Rental Exception:  When your rental’s average guest stay is seven days or less, or sometimes up to 30 days if you provide substantial services (like cleaning or meals), the IRS can treat the activity as a business rather than a typical rental.

• Material Participation:  You must actively participate in the STR. This means meeting one of the IRS’s material participation tests:

o 100+ Hour Test: You (and your spouse, if applicable) spend at least 100 hours on the property, and no one else (like a cleaner or manager) spends more time on it than you.
o 500-Hour Test:  You put in at least 500 hours.
o Substantially All Work:  You do almost all the work yourself.

• Achieve “Non-Passive” Status:  If you satisfy these requirements, your STR activity is classified as non-passive. That means losses—especially those amplified via cost segregation and bonus depreciation—can offset your active income without being capped by the usual $25,000 passive activity loss       limits or the real estate professional status hurdle.

Maximizing Tax Savings

• Cost Segregation & Bonus Depreciation: Use a cost segregation study to accelerate depreciation deductions. Thanks to OBBA, 100% bonus depreciation remains available in 2025, making it possible to create large “paper losses” in the first year and use them to offset your W-2 or business income.

• Careful Documentation: Keep detailed time logs proving your material participation—track your hours and those of any contractors or service providers.

• Audit-Ready Bookkeeping: Maintain strong documentation and stay updated on both IRS rules and local STR regulations.

Why It’s Powerful

Classifying your STR as non-passive lets you bypass the passive loss limits—an enormous advantage for high-income earners who want to use substantial real estate losses (from cost seg and bonus depreciation) to reduce their regular income tax bill in 2025 and beyond.

In summary: To sidestep passive loss caps, convert your short-term rental into a non-passive business via active material participation, maximize cost seg/bonus depreciation, and document everything. This gives you a rare opportunity to offset W-2 or business income with real estate losses and potentially save five or six figures in taxes each year. Always work with a qualified CPA familiar with STRs and the latest 2025 rules for compliance and audit defense.