Short Term Rental Loophole: FAQ
Overview
We are looking to capture massive tax savings for the tax year of the purchase of the asset.
This guide will help you pro-actively show what the IRS calls “Material Participation” in running your short-term rental.
Material Participation as a concept means that you are contributing the most effort toward running your asset.
After this first calendar year, if you decide that you want to be completely hands off in running your short-term rental, that is acceptable and you will retain tax savings.
This highly effective tax savings strategy can accelerate wealth for high income individuals, but is only for short-term rental assets. Commercial, long-term, and medium-term rentals do not qualify.
Why Short-Term Rentals Only?
The IRS has a special designation for rental properties with an average annual nightly stay of 7 or less days.
The properties are called “transient properties”.
Unlike a more traditional long-term rental residential property, a transient property depreciates over 39 years and qualifies for massive up-front depreciation.
How is the Depreciation Calculated?
The IRS allows a short-term rental owner to take what is called Bonus Depreciation.
Bonus Depreciation means anything that has a useful life of less than 20 years can be fully depreciated at the time of purchase.
In your purchase, the land, building, and anything bolted to it do not qualify for bonus depreciation.
Everything else does, eg. Furniture, appliances, landscaping, certain floors and decks, and more.
A good cost segregation team will go through your asset with extreme detail and manually calculate the value of everything eligible for bonus depreciation.
A good team will capture approximately 25% of the purchase price as a very broad rule of thumb.
How to Run a Cost Segregation Report?
Conact [email protected] for our preferred cost segregation team recommendation.
The cost segregation report does not need to be done immediately.
The report needs to be executed and delivered to your CPA before filing taxes for the year of purchase.
We recommend having the report done during your asset’s off-season where the opportunity cost is lowest. On 30A this would be January or February.
How Do I Prove Material Participation?
Show 100+ hours in the year of qualified activities for your short-term rental.
Any of the following activities would qualify as material participation:
- real property development
- redevelopment
- construction
- reconstruction
- acquisition
- conversion
- rental operation
- management
- leasing
- brokerage trade or business
Create a simple journal to track your participation, it could look like:
Date: Time: Activity:
You will be very involved whether you self-manage or your property qualifies as a Stay On 30A rental.
The few minutes spent tracking time on the acquisition, set-up, and marketing of the asset will fast-track you to the future tax savings.
How Do I Prove Material Participation? (Continued –>).
How Do I Prove Material Participation?
Ensure that you are the individual spending the most hours managing your asset in the year of purchase.
If you are self-manage, it will be self-evident.
Otherwise, I recommend writing the following email to the property manager:
Dear PM,
Thank you for bringing our asset to market in 2025. We are hoping for a prosperous year.
We will need you to protect our 100-hour material participation status in 2025 following the 100-hour rule. No single employee of yours can exceed my material participation.
Thanks,