The Short Term Rental Tax Loophole Every STR Owner Should Know

November 21, 2025 8 min read

Key Takeaways

The short-term rental tax loophole, known as the Airbnb tax loophole, allows landlords to classify rental income as active rather than passive, unlocking various tax breaks and credits.
To qualify for this loophole, landlords must meet specific criteria regarding average stay durations and provide personal services, while demonstrating material participation in their rental activities.
Additional tax strategies, such as bonus depreciation and cost segregation, can enhance savings for short-term rental managers.

What is the Short Term Rental Tax Loophole?

The short-term rental loophole, often referred to as the Airbnb tax loophole, is an IRS-approved tax strategy that can help short-term rental landlords save more of their earnings by classifying their rental income as active rather than passive. Essentially, the IRS allows property managers to treat their rental income as business income instead of rental activity income, which opens the door for a number of tax breaks and credits.

In this article, we’ll take you through the important aspects of this tax loophole, how you can qualify, and most importantly, how you can claim it.

How to Qualify for the Short Term Rental Loophole

Loophole Criteria

To qualify for the STR loophole, your activity has to meet any of the following exceptions:

The average stay is 7 days or less. To find this, you’ll need to divide the total number of rental days by the total number of rentals. Additional instructions can be found here on the IRS website.
The average stay is 30 days or less, and you provide significant personal services. These can include daily cleaning services, catered meals, transportation, and other hotel-like activities. They do not include:

Services required to “permit the lawful use of the property”
Services that improve or extend the rental’s quality substantially past the average stay
Services needed for functionality, such as repairs and maintenance.

You provide extraordinary personal services that are readily available for use. Essentially, if tenants are renting for the reception of particular services.

There are a few other exceptions as well, which you can find on the IRS website here.

Material Participation

Additionally, you must materially participate in the business for it to be considered active income. The IRS offers a test for material participation, and landlords must meet any of the requirements to be eligible for tax breaks:

Participation in the activity for at least 500 hours throughout the year, which includes things like tenant screening, lease signing, bookkeeping, and more.
Your participation in the activity is substantially all the participation of all individuals associated, meaning you did almost all of the work.
Participation in the activity for at least 100 hours throughout the year and no one else participates more hours than you, meaning no one else worked more than you on the business activities.
It’s a significant participation activity (a business task that takes at least 100 hours) and you participate in at least 500 hours of significant participation activities
You’ve taken part in the business for 5 of the preceding 10 years
The activity is a personal service activity (which includes the performance of services in the fields of health, law, engineering, performing arts, etc.) that you’ve materially participated in for any 3 preceding years, where the rental is not the primary source of income
You can prove regular, continuous, and substantial participation throughout the year

Short-term rental business managers should focus on meeting any of the first three requirements, as they’re the most common for them.

Using the Loophole

Once certain you’ve met any of the criteria, landlords can simply deduct their rental losses from their (now) active income, which will reduce your taxable income and increase the money you get to keep.

If you expect to use this loophole, it’s vital that you keep meticulous records of not just your finances, but the hours of labor you’re putting in as well. The IRS may require you to provide documentation of your hours, so you must be prepared to provide them.

Defining Elements of the STR Loophole

Understanding all of the moving parts associated with the Airbnb tax loophole can be difficult. Here are a few quick definitions to clear some things up.

What Qualifies as a Short Term Rental?

Per the IRS, a short-term rental property is one that has an average stay of 7 days or less. However, there are a few other exceptions that allow properties with an average stay of 30 days to qualify for this tax break (which we’ll discuss later on).

Additionally, you may want to consider the minimum use rule (also known as the Augusta Rule): If you dwell in a unit as your personal residence and rent it out for 15 days or less, you don’t have to report your rental income or deduct expenses. So, if you rent your house out very minimally, you may not have to pay taxes on your earnings at all.

What’s the Difference Between Passive and Active Income?

Passive income includes any money made passively, meaning you aren’t earning the money from work or employment. This includes sources with low time commitment such as real estate investments, stocks, high-yield accounts, royalties, and more.

Active income includes any income made actively, meaning you’re earning the money from work or employment. This includes your more traditional W-2 jobs—a 9 to 5 or something similar that requires your active involvement in it.

Although real estate earnings are typically filed as sources of passive income, the STR loophole allows you to file it as active income. This change may seem small, but it allows filers to take advantage of an array of tax breaks.

Additional Tax Breaks for STRs

Bonus Depreciation

Many landlords can also utilize bonus depreciation—a strategy that allows filers to deduct the cost of select assets all at once rather than over the asset’s lifetime. This way, landlords can reap the benefits of their depreciation sooner. Bonus depreciation was in the process of being slowly phased out until it was permanently renewed in 2025, so landlords don’t have to worry about timeframes anymore.

Reclassifying Assets

Cost segregation is another popular way to make the most of your assets’ depreciation. Instead of depreciating an entire asset, such as a rental property, landlords can break down the cost of the asset into its parts rather than its entirety. A given rental property’s value (and depreciation) can be broken down into its appliances, the structure itself, its amenities (such as a pool), and so on.

With each individual asset depreciating, landlords can get larger tax breaks quicker. To reclassify assets though, you’ll need a cost segregation study completed, where professional appraisers break down the price of each part.

Section 179 Deductions

With Section 179 tax deductions, landlords can also depreciate the total price of certain purchases made throughout the year. This can include equipment and even software acquired in the process of maintaining your business.

Conclusion

As a short-term rental manager, there are so many impossible-to-predict variables. Tax season, though, doesn’t have to be unpredictable. With this tax loophole, you can pay less in taxes each year so that the money saved can go to more important things.

Already stressed about filing? Ledgre, an affordable cloud-based accounting software built specifically for landlords, is here to help. It can do everything you’ll need to maximize your savings, and then some.

Disclaimer: Ledgre does not provide tax or legal advice. All information and materials available on this site are for general informational purposes only. Contact a tax professional for advice with respect to a specific tax matter.

FAQs

What is the short term rental tax loophole?

The short-term rental tax loophole, or Airbnb tax loophole, allows landlords to classify rental income as active rather than passive, thereby unlocking numerous tax breaks and credits.

How can landlords qualify for the short term rental tax loophole?

Landlords qualify if their rental activity meets certain criteria, such as an average stay of 7 days or less or providing substantial services like daily cleaning and catering.

What is material participation, and why is it important?

Material participation means actively managing your rental business. Landlords must meet IRS-defined criteria to classify rental income as business income.