The so-called “STR loophole” is a legal way to treat your short-term rental income as non-passive — meaning you might be able to deduct rental losses against your regular income like W-2 wages or business profits.

Normally, rental losses get trapped as passive losses and can only offset other passive income. But with STRs, if you meet a few key rules, you can sidestep that limit — which can mean big tax savings.

If your average rental period is 7 days or less (like Airbnb or VRBO stays), the IRS doesn’t treat it like a normal long-term rental — it’s more like running a hotel. So, the activity is not automatically passive. If you also materially participate — meaning you do the real work of managing guests, cleaning, communicating, and maintaining the property — your losses can become active.

That means you can deduct them directly against your other income, which is a huge benefit if you’re showing losses from depreciation, repairs, or startup costs.

There are two key parts:

1️⃣ Rental Period: The average stay must be 7 days or less — or 30 days or less if you provide substantial personal services (like daily cleaning, meals, concierge).

2️⃣ Material Participation: You need to be involved enough to count as actively running the business — that usually means spending at least 100 hours on the property and more time than anyone else (like cleaners or managers).

 Almost everything related to running your short-term rental can be deductible: mortgage interest, property taxes, utilities, insurance, repairs, cleaning, supplies, maintenance, HOA fees, and depreciation on the building itself and furnishings. If you do it right, you can generate paper losses from depreciation — and offset your W-2 or business income to lower your total tax bill.

Nope — this loophole is only for rentals that qualify as short-term. Long-term rentals (average stays over 30 days, no hotel-style services) are always passive unless you qualify as a Real Estate Professional (which has its own strict rules).

So if you’re only renting to month-to-month tenants, this loophole won’t help you.

Not necessarily. You can run a short-term rental under your own name, as a sole prop, or through an LLC for legal protection.

The tax benefit comes from how you operate the rental, not the entity itself. An LLC may help with liability, but it won’t change the loophole’s rules. What matters is your average rental period and your material participation.

The IRS knows this loophole exists — and they do look at STR operators more closely now. If you get audited, they’ll check your guest records, booking logs, calendar, communication with cleaners or property managers, and your actual time spent managing the rental.

If you can prove it with good records, you’re fine. If not, your losses could get reclassified as passive — meaning you lose the benefit and might owe back taxes plus penalties. So: track everything.

If you own (or are thinking about buying) a vacation rental, and you plan to manage it yourself or keep heavy involvement, it’s one of the best legit ways to unlock real tax savings. If you’re hands-off and just want passive income, you won’t qualify — but you’ll still get normal deductions, just with the passive loss limits.

Want to see if you fit? Book a free call — I’ll break it down for your situation and help you set it up right so you keep the savings if the IRS ever comes knocking.