Tax Benefits of Short-Term Rentals

Short Term Rentals (STRs) are the perfect investment vehicle for Physicians and other High-Income Earners who are interested in real estate investing but are unable to qualify for REPS (Real Estate Professional Status).  (see REPS What is it Good For….)

Short Term Rentals (STRs) fall into a special category in Real Estate which is perfectly described in “The Ultimate Guide to Eliminating Your Tax Bill While Sleeping Well at Night” by Brandon Hall CPA (The Real Estate CPA).   

He writes most “AirBnB and VRBO properties are not considered “Rental Activities” under Section 469.”  Treas. Reg. Sec. 1.469-1T(e)(3)(ii)(A) provides an exception that states an activity is not a Section 469 rental activity if the average period of customer use for such property is seven days or less“.

Therefore, if Short Term Rentals do not count as Rental Activity then you do not need to qualify for REPS (Real Estate Professional Status) to claim losses as non-passive.  This means you can still practice medicine while enjoying your property and the tax benefits associated with short term rentals. 

To claim your losses as non-passive you will need to demonstrate that you materially participate in the management of your Short-Term Rental.  That means you will need to manage your Short-Term Rental via Airbnb, VRBO or other services and demonstrate that your material participation is more than anyone else working on the property. (IRS link, Material Participation)

In addition, Brandon Hall (The Real Estate CPA) outlines that this form of short-term rental activity would be reported on your Schedule E activity as a non-passive income. The reason for this classification rather than a Schedule C is that you are not providing substantial services to your tenants.  Example: Hotel Like Services (you are not providing airport shuttling or meals etc)

In Summary, Short Term Rentals allow you to invest in property that you can enjoy while allowing you the ability to claim non-passive losses without requiring you to qualify for REPS (Real Estate Professional Status).  This means that you can continue to practice full time in your field, if you desire, while enjoying a property with significant cash flow and tax saving benefits. 

Leave a Reply

Your email address will not be published. Required fields are marked *