The Short-Term Rental Loophole Gets Stronger With Permanent 100% Bonus Depreciation
A Treasury regulation buried in the tax code lets certain rental owners sidestep the passive loss rules entirely, and a new law just made the resulting write-off permanent. Whether you qualify comes down to a single number your guests determine.
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Most landlords learn a frustrating lesson in their first tax season. A rental property can throw off a big paper loss, and that loss still can’t touch their paycheck. The tax code treats rental losses as passive, and passive losses generally offset only passive income.
A short-term rental can avoid that wall. Under a Treasury regulation, a property whose guests stay a week or less on average doesn’t count as a rental activity at all. Combine that with the 2025 tax law known as the One Big Beautiful Bill Act, which made 100% bonus depreciation permanent, and an owner who runs the property hands-on can deduct a large first-year depreciation write-off against wages or business income. Tax pros call it the short-term rental loophole.
Why Rental Losses Usually Can’t Touch Your Paycheck
Section 469 of the Internal Revenue Code states that “the term ‘passive activity’ includes any rental activity” (26 U.S.C. § 469(c)(2)). IRS Publication 550 spells out the consequence: “you are allowed to deduct passive activity losses only up to the amount of your passive activity income.”
There are narrow exits. Owners who actively participate can deduct up to $25,000 of rental losses against other income, but income limits reduce that allowance for high earners. Real estate professionals have their own path, which requires more than 750 hours a year in real property trades or businesses. That’s out of reach for a surgeon or a business owner with a full-time job.
Seven-Day Rule That Pulls a Rental Out of the Rental Rules
The short-term rental exception lives in 26 CFR 1.469-1T(e)(3)(ii), the Treasury regulation defining rental activity for the passive loss rules. Under paragraph (A), an activity is not a rental activity if “The average period of customer use for such property is seven days or less“.
Paragraph (B) extends the window to 30 days or less when “significant personal services” are “provided by or on behalf of the owner of the property in connection with making the property available for use by customers.”
“Average period of customer use” is simpler than it sounds. Roughly, take the total days guests occupied the property during the year and divide by the number of separate stays. A beach house reserved mostly for long weekends lands well under seven days. A unit rented by the month does not.
Escaping Rental Status Only Gets You Halfway
Clearing the seven-day test turns the property into a business activity, and business activities carry their own passive trap. Section 469 treats a trade or business as passive if the taxpayer “does not materially participate” in it.
Material participation means involvement that is “regular,” “continuous,” and “substantial” under 26 U.S.C. § 469(h)(1). In practice, that means the owner handles the real work: pricing, guest messaging, cleaning coordination, repairs. Owners who hand everything to a full-service property manager risk failing this step, which leaves the losses passive and stuck.
How Permanent 100% Bonus Depreciation Supercharges the Write-Off
Under 26 U.S.C. § 168(k)(1)(A), qualified property gets a first-year allowance “equal to 100 percent of the adjusted basis of the qualified property” in the year it’s placed in service. The catch: qualified property must have a recovery period of 20 years or less under § 168(k)(2)(A)(i)(I).
The building itself is depreciated over a much longer period, so the structure doesn’t qualify, and land never depreciates at all. That’s why short-term rental owners commission cost segregation studies. An engineer breaks the purchase price into components, separating furnishings, appliances, certain fixtures and land improvements such as patios or landscaping from the building shell. Those shorter-lived pieces can qualify for the full first-year write-off.
Bonus depreciation had been phasing down under prior law. Permanence lets owners plan purchases without racing a sunset date.
Recapture and Recordkeeping Can Erase the Win
Every dollar deducted comes off your basis. The statute says the adjusted basis “shall be reduced by the amount of such deduction”. When you sell, IRS Publication 544 explains that gain on section 1245 property, which includes “Personal property”, “is treated as ordinary income to the extent of depreciation allowed or allowable on the property.” Bonus depreciation largely postpones tax rather than eliminating it, unless the property is held until death and receives a step-up in basis.
Documentation matters too. Publication 544 says owners “must keep permanent records” of cost, basis and depreciation. Short-term rental owners also need reserved records showing the average stay and a contemporaneous log of their own hours. Without them, an IRS examiner can reclassify the losses as passive.
State returns can vary, too. Some states decouple from federal bonus depreciation, so the state deduction may arrive more slowly.
The strategy fits a specific profile: a high earner who buys a vacation-style property and actively runs it. Passive investors and owners of monthly rentals get little from it. With recapture, participation tests and cost segregation fees in play, this is math worth running with a CPA before closing on the property.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
