How the short-term rental strategy works
Rental losses are normally passive, so they can't touch your salary. Short-term rentals can be different. If the average guest stay is 7 days or less, the property isn't treated as a rental activity under the passive loss rules. If you also materially participate, the losses can offset your W-2 or business income. That's what people call the "STR loophole."
And 100% bonus depreciation is back for property bought and placed in service after January 19, 2025. Pair that with a cost segregation study and the first-year deduction can be big.
It only works if the facts and the records hold up, and this is an area the IRS looks at. So we set it up with you once, the right way, then put it on your return.
Watch: The STR strategy in 2 minutes
Sargis walks through the two gates a short-term rental has to clear, where the loss comes from, and what the STR Year-One Setup costs.
Read the transcript
Own a short-term rental, or thinking about buying one? There's a tax strategy you've probably heard about. Let's walk through how it actually works.
Normally, rental losses are passive. They can only offset other passive income, not your paycheck.
But short-term rentals can play by different rules. People call it the STR loophole. Really, it's two gates you have to clear.
Gate one: the average guest stay. Divide your rental days by the number of stays. If the average is 7 days or less, or 30 or less with significant hotel-style services, the usual passive rental rule doesn't apply.
Gate two: material participation. That means you actually run it. Common ways to qualify: 100 hours or more, and more than anyone else, including your cleaners. Or 500 hours or more. Your spouse's hours count too.
Clear both gates, and a tax loss from the rental may offset your W-2 or business income.
Where does the loss come from? Often, cost segregation. A study splits the property into shorter-life parts, so depreciation comes faster. And qualifying property acquired and placed in service after January 19, 2025 can take 100% bonus depreciation in year one.
One habit makes it all hold up: keep an hours log as you go. Date, task, time spent.
Who's it for? Short-term rental owners with W-2 or business income, who'll truly run the property themselves. If a manager handles everything, it usually isn't a fit.
Here's what we'll do for you. We check that you qualify, give you hours-log templates, coordinate the cost segregation study, and put the bonus depreciation on your return, with two strategy meetings along the way.
What it costs. The STR Year-One Setup starts at $1,500 per property, one time. Later years start at $500 per property, and an optional Q4 hours check is $250. Your tax return, from $600 if married filing jointly, and the cost seg firm's fee are separate. The final price is confirmed after we look at your situation.
On the free discovery call, we look at your numbers, confirm it fits, and you leave with a clear next step and a price. Book yours at nxtlevelcpa.com.
General education, not tax advice for your situation.
STR Year-One Setup: $1,500 per property
One time, per property, for the tax year you start. Here's what's included:
- Qualification check. Your 7-day average stay and personal-use days, from the platform reports. You get a clear yes, no or at-risk for the year.
- Hours plan and log. Which participation test fits your household, who logs the hours, plus our hours-log templates and a one-page "what counts" sheet.
- Cost seg go/no-go. We tell you whether a study is worth it for this property, get vendor quotes, send them what they need and review the finished study.
- 100% bonus on your return. The depreciation schedule and bonus election done right.
- Schedule E for that property, and Form 3115 if missed depreciation needs catching up.
- Two strategy meetings with Sargis, with a short written list of what to do before December 31.
Not included: the 1040 itself (married filing jointly from $600), and the cost segregation study fee, which the study firm bills you directly.
What a typical year one costs
A married couple with W-2 jobs and one short-term rental:
| Item | What it covers | Price |
|---|---|---|
| 1040, married filing jointly | Your personal return, one state included | $600 |
| STR Year-One Setup | Everything above, including the Schedule E and Form 3115 if needed | $1,500 |
| Total to us | Year one, all in | $2,100 |
| Cost segregation study | Only if it makes sense, billed by the study firm | Quoted by the firm |
Optional add-ons: STR Repeat Year, $500 per property for later years (we re-run the checks, review your log and carry everything forward). Q4 Hours Check, $250: send us your log by December 1 and we meet for 30 minutes before December 15 to close any gaps.
Buying or opening before December 31?
To count for this tax year, the property has to be placed in service, meaning ready and available for guests, by December 31. Your hours have to be logged this year too. Closing on December 30 with no furniture and no listing doesn't cut it.
So don't wait until tax season. Talk to us before you close or before the listing goes live, and we'll map out what needs to happen by year-end.
Qualification depends on your facts and records and isn't guaranteed. Results vary. Cost segregation studies are billed separately by the study provider. Extra properties, entities and states are quoted separately.
What clients say
“…extremely responsive and very knowledgeable about long term and short-term rental properties. I would definitely recommend him and look forward to working with him again next year!”
“Sargis did my complicated taxes! I really liked the video he made me.”
“Sargis is the exact reason why you hire a CPA to do your taxes versus filing yourself, you don't know what you don't know!”
Questions we get asked
How much does the STR Year-One Setup cost?
$1,500 per property, one time. It includes that property's Schedule E, Form 3115 if missed depreciation needs catching up, the qualification check, the hours log, the cost segregation go/no-go and vendor coordination, 100% bonus depreciation on your return, and two strategy meetings. Your 1040 is separate (married filing jointly from $600), so a typical year one for a W-2 couple with one rental is $2,100. The cost segregation study is billed by the study firm.
What is the 7-day rule for short-term rentals?
If the average guest stay at your property is 7 days or less for the year, the IRS doesn't treat it as a rental activity under the passive loss rules. That's step one. Step two is material participation: if you also put in enough hours, the losses can offset your W-2 or business income. We check your average stay and personal-use days from the platform reports.
How many hours do I need to put in?
The two tests most owners use are 100 hours or more and more than anyone else, including your cleaner and property manager, or 500 hours or more. Which one fits depends on your household and how the property runs. Either way, you need a log kept during the year, not rebuilt in April. We set one up with you.
Is a cost segregation study always worth it?
No. The study costs money, the extra deductions can be recaptured when you sell, and a big loss only helps if you can actually use it. We tell you whether it's worth it for your property, get quotes from study firms, and review the finished study before it goes on your return.
I already own my rental and never took depreciation. Can I catch up?
Usually, yes. Form 3115 lets you take the missed depreciation as a single catch-up in the current year without amending old returns. If you need it, it's included in the STR Year-One Setup.
Do you work with short-term rental owners in other states?
Yes. Everything is remote: secure uploads, e-signatures and Google Meet. We work with STR owners in all 50 states.