Your STR is more than a property.
It's a highly tax-advantaged investment.

Under Internal Revenue Code (IRC) Section 469, rental activities are generally classified as passive activities by default, regardless of your level of participation. This means passive losses from real estate cannot normally be offset against active income, such as W-2 wages or business profits.

However, there is an exception to this rule. If a property's average guest stay is 7 days or less, it is excluded from the IRS definition of a "rental activity" under Treasury Regulation Section 1.469-1T(e)(3)(ii)(A). By bypassing this rental classification, the property is treated as a business rather than a passive rental, allowing tax losses to potentially offset non-passive income.

Bypassing the passive rental activity definition is only the first step. To offset non-passive (e.g., W-2 or business) income with short-term rental depreciation losses, you must demonstrate "Material Participation" in the operation of the property. The IRS provides seven tests to prove material participation under Temp. Reg. Section 1.469-5T(a).

The two most common tests used by STR investors are:

• The 100-Hour Standard: You participate in the activity for more than 100 hours during the tax year, and no other individual participates more than you (including property managers, cleaning crews, or co-owners).
• The 500-Hour Standard: You participate in the activity for more than 500 hours during the tax year, regardless of other participants' hours.

Typically, residential real property is depreciated on a straight-line basis over 27.5 or 39 years. However, a cost segregation study analyzes your property to identify building components that qualify for faster depreciation cycles.

An engineering-based study separates land improvements (like driveways, fences, and landscaping) and personal property (like furniture, appliances, lighting, and decor) from the structural envelope. These assets are reclassified into 5-year, 7-year, or 15-year recovery periods, allowing you to front-load depreciation expenses into the early years of ownership.

Bonus depreciation allows real estate investors to write off a significant portion of the cost of eligible, short-lived property components (typically assets with a recovery period of 20 years or less) in the very first year they are placed in service.

This tax incentive is subject to a phased schedule established by the Tax Cuts and Jobs Act of 2017:

• 2023: 80% first-year bonus depreciation.
• 2024: 60% first-year bonus depreciation.
• 2025: 40% first-year bonus depreciation.
• 2026: 20% first-year bonus depreciation.

The remaining cost of the components is depreciated over their normal useful life. Combining cost segregation with bonus depreciation can generate substantial tax write-offs in year one.

Often referred to as the "Augusta Rule," IRC Section 280A(g) allows homeowners to rent out their primary residence or second home for up to 14 days per calendar year without having to report any of the rental income to the IRS.

To qualify, the home must be used as a personal residence for more than 14 days or 10% of the days it is rented, and it must not be rented for more than 14 days in total during the year. This income is completely tax-free, and you are not required to report it on your federal income tax return.