If you own a short-term rental, three federal tax rules combine to produce the most powerful Year-1 setup in real estate: the STR exception under IRC §469, material participation, and cost segregation with 100% bonus depreciation.
1. The §469 STR exception
Long-term rentals are presumed passive under §469. STRs with average guest stays of 7 days or less are NOT considered rental activities — so the §469 rental rules don't apply. Material participation alone (no REPS required) is enough to make losses non-passive.
2. Material participation tests
Seven IRS tests determine material participation. Most STR owners qualify under either the 100-hour test (100+ hours and nobody else does more, including pros) or the 500-hour test (500+ hours/year on the activity).
3. Cost seg + 100% bonus depreciation
Cost segregation reclassifies 20-28% of an STR's basis from 27.5-yr depreciation into 5/15-yr buckets. Under 100% bonus depreciation (permanent under OBBBA), that bucket is fully deductible Year-1 — and because the loss is non-passive (per #1 and #2 above), it offsets W-2 income, business income, and capital gains.
Worked example
$615K Gulf Shores STR, materially participated. Cost seg reclassifies $137,225 into 5/7/15-yr buckets. 100% bonus deducts the full $137K Year-1. At 37% bracket, that's a $50,773 federal tax benefit — offsetting W-2 income because the loss is non-passive.
Documentation requirements
- Time log showing material participation (template included in the download)
- Average guest stay calculation (proves <7-day exception applies)
- Engineered cost segregation report
- If lookback: Form 3115 prepared by your CPA