The short-term rental tax loophole is the rule that a rental whose average customer stay is seven days or less is not a "rental activity" under Treas. Reg. §1.469-1T(e)(3)(ii)(A), so when the owner also materially participates, its loss, including the depreciation cost segregation accelerates, is nonpassive. That loss can offset wages only to the extent the basis, at-risk (§465) and excess business loss (§461(l)) limits allow.
It is called a loophole, but it is the text of a regulation, and it works only when every condition is met and documented. A cost segregation study does not create the exception. It sizes the loss: it splits a property's cost into 5-, 7- and 15-year components that can take bonus depreciation, which is what turns a nonpassive classification into a large first-year deduction. This guide covers the requirements, the average-stay arithmetic, the 30-day variant, the seven material participation tests, how cost segregation and bonus depreciation build the loss, the personal-use limits, what the exception is not, and what happens at sale.
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Is There a Tax Loophole for Short-Term Rentals in 2026?
Yes, in the narrow sense that the passive activity regulations exclude short-term rentals from the "rental activity" label, which changes how their losses are tested; it is not a gap in the law and it is not available to every Airbnb owner. A short-term rental’s loss, including the depreciation a cost segregation study accelerates, can offset wages and other nonpassive income, but only when the property’s average period of customer use for the year is seven days or less (so that under Treas. Reg. §1.469-1T(e)(3)(ii)(A) it is not a rental activity), the taxpayer materially participates in it under one of the seven tests in Treas. Reg. §1.469-5T(a) (for example, more than 500 hours in the year, or more than 100 hours and not less than any other individual), and only to the extent the basis, at-risk (§465) and excess business loss (§461(l)) limits also allow it; the regulation’s other exceptions, such as an average stay of 30 days or less with significant personal services, are separate tests.
That one sentence holds the whole strategy, and each clause is a place where owners lose it. The rest of this guide takes the clauses in order. For the shorter overview of the same exception, see our earlier guide to how cost segregation works on an Airbnb, and for the page that explains the study itself, see short-term rental cost segregation.
What Are the STR Loophole Requirements?
The STR loophole requires four things in the same tax year, and failing any one of them leaves the loss passive or limited:
- The average period of customer use is seven days or less for the year (Treas. Reg. §1.469-1T(e)(3)(ii)(A)), or 30 days or less with significant personal services provided by or on behalf of the owner (§1.469-1T(e)(3)(ii)(B)).
- The owner materially participates in the activity under one of the seven tests in Treas. Reg. §1.469-5T(a), with the hours documented.
- The property is placed in service in that year (ready and available for guests), because depreciation, including the depreciation a cost segregation study accelerates, begins only then.
- The loss clears the other limits: the owner's basis, the at-risk rules of §465, the excess business loss rule of §461(l), and the personal-use limits of §280A where the owner uses the property.
The first two are the exception. The third sets when depreciation starts, and the fourth decides how much of the loss is allowed. A property that meets the first two with no large depreciation produces a nonpassive classification with little to offset, which is why the exception and cost segregation are usually discussed together.
How Does the Seven-Day Average-Stay Rule Work?
The seven-day rule compares the property's average period of customer use for the year to seven days, and a property at or under seven days is not a rental activity for §469 purposes. The regulation computes the average by dividing the aggregate number of days in all periods of customer use by the number of those periods, counting only periods that end during the tax year or that include its last day (Treas. Reg. §1.469-1(e)(3)(iii)(C)).
Three details change the arithmetic. Each period during which a customer has a continuous or recurring right to use the property is a separate period of customer use, whether the right comes from one agreement or from renewals of it (§1.469-1(e)(3)(iii)(D)). Where an owner has more than one class of property, the activity's average is the sum of each class's average weighted by that class's share of gross rental income (§1.469-1(e)(3)(iii)(A) and (B)). And the average is an annual figure, so it is tested for each tax year separately.
Hypothetical, not a forecast. A single house has 200 days of customer use across 40 stays: 200 divided by 40 is an average of 5 days, so it passes. The same 200 days across 10 stays is an average of 20 days, so it does not pass the seven-day test, and it would be a rental activity unless the 30-day rule below applies.
What Is the 30-Day Rule With Significant Personal Services?
An activity is also not a rental activity when the average period of customer use is 30 days or less and significant personal services are provided by or on behalf of the owner in connection with making the property available to customers (Treas. Reg. §1.469-1T(e)(3)(ii)(B)). It is a separate test with its own facts, not a longer version of the seven-day rule.
Personal services count only if individuals perform them, and whether they are significant turns on all the facts and circumstances, including how often they are provided, the type and amount of labor, and their value relative to the amount charged for use of the property (§1.469-1T(e)(3)(iv)(A)). The regulation excludes services necessary to permit lawful use of the property, services in constructing improvements or making repairs that extend the property's useful life for a period substantially longer than the average period for which it is used by customers, and services similar to those commonly provided with long-term rentals of high-grade property, such as cleaning common areas, routine repairs, trash collection, elevator service and security at entrances (§1.469-1T(e)(3)(iv)(B)). A property averaging 8 to 30 days with only those excluded services is therefore still a rental activity unless another exception in that paragraph applies. Material participation is required under this exception as well.
What Does Material Participation Require for a Short-Term Rental?
Material participation means meeting one of the seven tests in Treas. Reg. §1.469-5T(a) for the tax year. Except as paragraph (e) of that section (limited partners) and paragraph (h)(2) (certain retired farmers and surviving spouses) provide, an individual materially participates if and only if one of these is met:
- The individual participates in the activity for more than 500 hours during the year.
- The individual's participation is substantially all of the participation of all individuals, including individuals who do not own an interest in the activity.
- The individual participates for more than 100 hours and not less than any other individual, including cleaners, co-hosts and property managers who are not owners.
- The activity is a significant participation activity (more than 100 hours) and the individual's aggregate participation in all significant participation activities exceeds 500 hours.
- The individual materially participated in the activity for any five of the ten preceding tax years.
- The activity is a personal service activity, in fields such as health, law or accounting, and the individual materially participated for any three preceding years. It applies to personal service activities, not to a rental property.
- Based on all the facts and circumstances, the individual participates on a regular, continuous and substantial basis, which cannot be satisfied with 100 hours or less (§1.469-5T(b)(2)(iii)), and under which management services are disregarded unless no one else who manages the activity is paid for it and no other individual performs more management hours (§1.469-5T(b)(2)(ii)).
For an owner with a day job, the third test, more than 100 hours and not less than anyone else, is the usual route, and the 500-hour test is the clean one. A property manager or cleaning crew who logs more hours than the owner defeats the third test, so outsourcing is a decision about the tests, not only about convenience. A tie in hours satisfies "not less than."
Four rules about counting hours matter in practice. A married individual's participation includes the spouse's participation in the activity, whether or not the spouse owns an interest and whether or not they file jointly (§1.469-5T(f)(3)). Work done as an investor, such as reviewing financial statements or monitoring operations in a non-managerial capacity, does not count unless the individual is directly involved in day-to-day management or operations (§1.469-5T(f)(2)(ii)). Hours can be proved by any reasonable means, and the regulation does not require contemporaneous daily logs if participation can be established by other reasonable means such as calendars, appointment books or narrative summaries (§1.469-5T(f)(4)); a dated log is still the strongest evidence. And the hours are tested for the year the loss is claimed, so projected hours do not count.
Why Does Nonpassive Treatment Matter for a Cost Segregation Loss?
Nonpassive treatment matters because §469(a) disallows a passive activity loss for the year, while a nonpassive loss is not subject to that disallowance, though it must still clear the basis, at-risk (§465) and excess business loss (§461(l)) limits. Under IRC §469(c), a passive activity is a trade or business in which the taxpayer does not materially participate, and it includes any rental activity (with the real estate professional exception in §469(c)(7)); under §469(a) the passive activity loss for the year is not allowed, and under §469(b) a disallowed loss is carried to the next year as a deduction allocable to the same activity.
A cost segregation study can produce a large depreciation loss on a rental. Without the exception, a loss from a rental activity is generally trapped as a carryforward unless the owner has passive income to absorb it, fits within the limited §469(i) allowance for an owner who actively participates, or is a real estate professional under §469(c)(7) who also materially participates in that rental. With the exception, the loss is tested as a loss from a business the owner materially participates in. "Nonpassive" is not the same as "deductible," though: the loss must still be allowed to the extent the basis, at-risk (§465) and excess business loss (§461(l)) limits also allow it, and under §461(l)(6) the excess business loss rule applies after §469. The post on Excess Business Loss Limit and Cost Segregation: Why a 2026 Depreciation Loss May Be Deferred covers that last limit, and Will Cost Segregation Help If My Rental or Short-Term Rental Loss Is Passive? covers the passive side.
The exception also does not decide the tax on the income side. Whether net income from a short-term rental is subject to self-employment tax is a separate question under IRC §1402(a)(1), which excludes rentals from real estate from net earnings from self-employment unless the rentals are received in the course of a trade or business as a real estate dealer, and it has its own regulations; ask your tax advisor about both sides.
How Do Cost Segregation and Bonus Depreciation Create the Loss?
Cost segregation creates the loss by reclassifying part of a short-term rental's depreciable cost from the structure into 5-, 7- and 15-year property, and bonus depreciation lets qualifying components of that reclassified cost be deducted in the first year. A furnished short-term rental can carry a meaningful share in the 5-year class (furniture, appliances and fixtures) and the 15-year class (site work such as driveways, landscaping and pools), and the study documents which components belong where. Bonus depreciation applies to qualified property with a recovery period of 20 years or less, so it reaches those classes and not the building shell or land.
Bonus depreciation under IRC §168(k) is 100%, permanently, for qualified property acquired after January 19, 2025 (OBBBA, 2025-07-04), or, for self-constructed property, whose construction began after that date; qualified property acquired on or before that date stays on the TCJA phase-down (as does self-constructed property begun on or before it) by placed-in-service year: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% after that, with each rate one year later for long-production-period property and certain aircraft (§168(k)(6)(B)). For that test the acquired date is not the closing date: under IRS Notice 2026-11 property bought under a written binding contract is acquired on the latest of the date the contract was signed, the date it became enforceable under state law, the end of any cancellation period and the date any contingency was satisfied, under a contract that is not binding (for example, one that limits damages to a specified amount) it is generally when more than 10 percent of the total cost, excluding land and preliminary activities, has been paid or incurred, and self-constructed property, including property built for the taxpayer under a written binding contract signed before construction began, is acquired when physical work of a significant nature begins (Treas. Reg. §1.168(k)-2(b)(5)); and used property qualifies only if the taxpayer had not used it at any time before acquiring it and the acquisition meets the §179(d) purchase rules that §168(k)(2)(E)(i) applies (for example, it was not acquired from a related party, by gift or inheritance, or with a carryover basis).
Hypothetical, not a forecast. A short-term rental has $800,000 of depreciable cost. Assume, for illustration only and not as a benchmark, that a study reclassifies $200,000 into 5-, 7- and 15-year property, that the property was acquired after January 19, 2025 under the conditions above, and that every reclassified component qualifies for bonus depreciation. The first-year bonus deduction on those components is $200,000. At an assumed 32% federal marginal rate, that is $64,000 less federal income tax in the year the loss is usable, if the owner meets the seven-day test and a material participation test and the loss clears the basis, at-risk and excess business loss limits. It is timing, not forgiveness: the building's remaining depreciation is spread over its recovery period, and recapture at sale is covered below. Under IRC §168(e)(2)(A), a building is 27.5-year residential rental property only if 80% or more of its gross rental income for the taxable year (counting the rental value of any part the taxpayer occupies) is rental income from dwelling units, and under §168(e)(2)(A)(ii) a unit in a hotel, motel or other establishment more than half of whose units are used on a transient basis is not a dwelling unit, so a building rented mostly to short-term guests can be 39-year nonresidential real property instead.
The cost segregation qualifier is the first step in seeing how a study would split your own property, and how cost segregation firms compare covers who does the work.
What Does "Placed in Service" Mean for a Short-Term Rental?
Property is placed in service when it is placed in a condition or state of readiness and availability for a specifically assigned function (Treas. Reg. §1.46-3(d)(1)(ii)), which for a short-term rental generally means ready and available for guests, not merely owned. Depreciation, including bonus depreciation on the components a cost segregation study identifies, begins in the tax year the property is placed in service, so for a calendar-year taxpayer a rental that is not ready for guests until the next year puts its first deduction in that next year.
The same date interacts with the exception, because the average stay and the hours are measured for the year. A property that opens in November has only a few weeks of stays and hours in its first year, and the regulation states no reduced hours threshold for it. The post Can I Use Cost Segregation With the Short-Term Rental Loophole if I Buy Late in 2026? works through that case.
How Do the Section 280A Personal-Use Limits Affect a Short-Term Rental Loss?
The §280A limits, which apply to an individual or S corporation owner, can remove the loss in the year when the owner uses the property for personal purposes more than a threshold number of days, because a home treated as a residence cannot produce a rental loss. Under IRC §280A(d)(1), an individual uses a dwelling unit as a residence if personal use exceeds the greater of 14 days or 10% of the days the unit is rented at a fair rental. Under §280A(c)(5), deductions for a residence use are limited to the gross income from the use, reduced by the deductions allowable anyway and the deductions allocable to the activity but not to the use, and the excess is carried to the next year.
What counts as personal use is broad. A day counts if, for any part of it, the unit is used by the owner or anyone with an interest in it, by a family member of the owner, by anyone using it under an arrangement that lets the owner use another dwelling, or by anyone who is not paying a fair rental, with exceptions such as an employee for whom §119 applies (§280A(d)(2)). Separately, where the owner uses the unit personally on any day, §280A(e)(1) limits the deductible rental expenses, depreciation included, to the fraction of those expenses that the days rented at a fair rental bear to the total days of use (§280A(e)(2) leaves out deductions allowable anyway, such as mortgage interest and property tax). And for a unit used as a residence that is rented fewer than 15 days, §280A(g) excludes the rental income and allows no rental deductions.
The practical reading is that an owner who wants a first-year cost segregation loss from a vacation home should count personal-use days, including family days and below-market stays, before the study is ordered.
Is the Short-Term Rental Loophole the Same as Real Estate Professional Status?
No, real estate professional status is a different route to nonpassive treatment, and it does not depend on the length of guest stays. Under §469(c)(7), a taxpayer is a real estate professional only if more than one-half of the personal services the taxpayer performs in trades or businesses during the year are performed in real property trades or businesses in which the taxpayer materially participates, and the taxpayer performs more than 750 hours of services during the year in real property trades or businesses in which the taxpayer materially participates (on a joint return, one spouse must meet both tests alone); the rental loss is then nonpassive only if the taxpayer also materially participates in that rental activity, with each rental tested separately unless the election under Treas. Reg. §1.469-9(g) to treat all interests in rental real estate as one activity was made. The short-term rental exception removes the property from the rental-activity category and then asks about material participation; it does not require 750 hours or that more than half of the owner's working time be spent in real estate, which is why it is the route discussed for owners with another full-time job.
The two can be compared on the same property: a long-term rental's loss generally offsets nonpassive income only if the owner is a real estate professional who also materially participates in that rental or fits within the limited §469(i) allowance (otherwise it is absorbed by passive income or carried forward), while a short-term rental that meets the seven-day test needs only material participation to be nonpassive, and its loss is still subject to the basis, at-risk (§465), excess business loss (§461(l)) and §280A limits. The hours rules for the professional route are in Real Estate Professional 750 Hours and Cost Segregation Before the 2026 Year Closes. The real estate professional status guide covers the two tests, spouses and the aggregation election.
What Is the 75-55 Rule for Airbnb?
The "75-55 rule" is not a rule in the Internal Revenue Code or in the §469 and §280A regulations read for this article, and no authoritative definition of it was found. It is not one of the tests the regulations use. The tests that decide the tax treatment of a short-term rental are the ones above: the average period of customer use, material participation, placed-in-service timing and the §280A personal-use limits. If a number from an online "rule" is being used to decide whether the exception applies, check it against those regulation sections before relying on it.
What Happens to Short-Term Rental Depreciation When You Sell?
Depreciation reduces the property's adjusted basis, so a taxable sale at a gain gives back part of the benefit as recapture. On a taxable sale at a gain, recapture applies, up to the amount of that gain, however long the property was held, outside the Opportunity Zone 10-year rule (a qualifying investment held 10 years with the IRC §1400Z-2(c) election): §1245 recapture on the 5- and 7-year property is ordinary income, as is §1250 recapture of the depreciation taken above straight-line (bonus included) on 15-year land improvements held more than one year, and the rest of the depreciation on those land improvements and on the 27.5- or 39-year structure is unrecaptured §1250 gain, taxed at up to 25% for a noncorporate taxpayer. The furniture and appliance components a short-term rental study finds are usually the 5-year property in the ordinary-income layer.
The mechanics are in two companion posts: What Is Section 1245 Property? The Building Components a Cost Segregation Study Finds covers the ordinary-income layer, and Unrecaptured Section 1250 Gain: What Cost Segregation Changes at Sale covers the 25% layer. A study accelerates deductions, and over the life of the property the same basis is recovered either way; whether the acceleration is worth more than the recapture depends on the rate when the deductions are used, the rate at sale and how long the property is held.
Do State Income Taxes Follow the Federal Short-Term Rental Treatment?
Not necessarily, because each state sets its own income tax rules. A state is not required to follow the federal passive activity rules or the federal bonus depreciation deduction, and some states have decoupled from federal bonus depreciation, so a federal first-year deduction can appear as a slower depreciation schedule on the state return. A state or city can also regulate or tax short-term rentals separately from income tax, such as through occupancy taxes and licensing. Confirm the state treatment for the property's state and the owner's state of residence with a tax advisor before modeling the savings.
Frequently Asked Questions
Is there a tax loophole for short-term rentals in 2026?
Yes, a narrow one: a rental whose average period of customer use for the year is seven days or less is not a rental activity under Treas. Reg. §1.469-1T(e)(3)(ii)(A), so if the owner materially participates, the property's loss, including cost segregation and bonus depreciation, is nonpassive, but only to the extent the basis, at-risk (§465) and excess business loss (§461(l)) limits also allow it. It does not apply to a property whose average stay is longer, unless the 30-day rule with significant personal services applies, and the §280A personal-use limits can still remove the loss.
What is the 75-55 rule for Airbnb?
It is not a tax rule: no section of the Internal Revenue Code or of the §469 and §280A regulations read for this article contains it, and no authoritative definition of it was found. The tax treatment of a short-term rental turns on the average stay, material participation, the placed-in-service date and the personal-use limits.
Does cost segregation work on a short-term rental if the average stay is more than seven days?
A cost segregation study still accelerates the depreciation, but whether the loss can offset wages and other nonpassive income depends on the route, and on the basis, at-risk (§465) and excess business loss (§461(l)) limits for any route: an average stay of 30 days or less with significant personal services provided by or on behalf of the owner (Treas. Reg. §1.469-1T(e)(3)(ii)(B)) takes the property out of the rental-activity category, and its loss is then nonpassive only if the owner also materially participates; a real estate professional under §469(c)(7) is nonpassive only if the owner also materially participates in that rental; and an owner who actively participates may use the limited §469(i) allowance. A rental that fits none of these routes or of the regulation's other exceptions is passive, and a passive loss that passive income does not absorb is disallowed under §469(a) and carried forward under §469(b).
How many hours do I need to materially participate in a short-term rental to use a cost segregation loss?
More than 500 hours meets the first test in Treas. Reg. §1.469-5T(a), and for an owner who works far fewer hours the usual route is more than 100 hours and not less than any other individual's hours on the property, including cleaners and managers; a spouse's participation counts toward the owner's hours under §1.469-5T(f)(3). Keep a dated log, because the hours are tested for the year the loss is claimed.
Do I need a cost segregation study to use the short-term rental loophole?
No, because the exception concerns whether the loss is passive, and a study only enlarges the loss: without one, the building is depreciated over its recovery period and the first-year deduction is small. A study and 100% bonus depreciation, which applies to qualified property acquired after January 19, 2025 as IRS Notice 2026-11 and Treas. Reg. §1.168(k)-2(b)(5) determine the acquired date, and for used property only if §168(k)(2)(E)(i) is met, are what make the nonpassive classification worth a large first-year amount.
Is short-term rental depreciation recaptured when I sell?
Yes, short-term rental depreciation is recaptured on a taxable sale at a gain. On a taxable sale at a gain, recapture applies, up to the amount of that gain, however long the property was held, outside the Opportunity Zone 10-year rule (a qualifying investment held 10 years with the IRC §1400Z-2(c) election): §1245 recapture on the 5- and 7-year property is ordinary income, as is §1250 recapture of the depreciation taken above straight-line (bonus included) on 15-year land improvements held more than one year, and the rest of the depreciation on those land improvements and on the 27.5- or 39-year structure is unrecaptured §1250 gain, taxed at up to 25% for a noncorporate taxpayer. Cost segregation changes when the deductions arrive, not the total depreciation over the life of the property.
