Quick guide · 3 min read
Short-term rentals
Rental losses are usually passive and cannot offset salary or RSU income. A rental with an average guest stay of seven days or less is not treated as a rental activity under those rules. If you also materially participate, its losses, often created by cost segregation, can offset wages.
- Who it fits
- High earners who buy a vacation rental and can manage it themselves.
- Usually not a fit
- Owners who will hand everything to a full-service manager.
- Figures
- 2026 tax year
The key rule
Two tests: an average stay of seven days or less, and material participation, most often by spending at least 100 hours on it and more than anyone else, or 500 hours in total.
How it works
Normally, rental losses are passive. They can only offset passive income, and the rest carries forward until you have passive income or sell. Short-term rentals with an average stay of seven days or less fall outside the rental definition. If you materially participate, the activity is not passive at all, so a loss can offset your salary, RSUs and business income.
The common ways to show material participation:
- 500 or more hours in the year.
- More than 100 hours, and more than anyone else, including cleaners and managers.
- You do substantially all the work yourself.
4 steps
Buy with the tests in mind
Choose a market where guests typically stay a few nights and where you can do much of the work yourself.
Log your hours from day one
Keep a dated log of time spent on setup, listing, guest messages, cleaning coordination, repairs and bookkeeping. Cleaners' and managers' hours count against you.
Combine with cost segregation
A study in the first year usually creates the loss that makes this worthwhile.
Confirm the average stay
Export booking data at year-end to show the average stay.
Example
A first-year loss
You buy a mountain cabin, spend 150 hours setting it up and managing guests, more than your cleaner's 90 hours, and the average stay is four nights. A cost segregation study creates a $180,000 first-year loss, which offsets your W-2 income and can save over $60,000 of tax at a 35% rate.
Common mistakes
- Hiring a full-service property manager usually makes the participation test hard to meet.
- Personal use days can affect the rules. Track them.
- Reconstructing hours at tax time. Logs kept as you go are far more convincing.
Key dates
- December 31
- Hours and average stay are measured for the calendar year.
Questions we hear
Does my spouse’s time count?
Yes. For material participation, both spouses' hours count together, even if only one is on the title.
What if the average stay is longer than seven days?
Then it is treated as a regular rental, and losses are usually passive unless you qualify as a real estate professional.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.