Short-Term Rental Loophole 2025: Make Airbnb Losses Non-Passive

Why investors care (in 60 seconds)

Most rental losses are passive, which means they normally can’t offset your W-2, business, or other non-passive income. Short-term rentals (STR) (think Airbnb/VRBO) can be different. If your rental isn’t a “rental activity” under the passive activity rules and you materially participate, your STR losses can be non-passive—which means they can offset W-2s, consulting income, interest, etc. That’s the “loophole.”

Plain English: get it right and a big cost-seg/bonus depreciation deduction from a new STR can reduce your ordinary income. Get it wrong and the same loss just piles up as passive carryforwards.

When a “rental” isn’t a rental

Under the passive activity rules, a “rental activity” generally means you’re paid for someone to use property you own. But there are exceptions. Two big ones for STRs:

Average stay < 7 days. If your average period of customer use is 7 days or less, the activity is not a rental activity.
Average stay < 30 days and you provide significant personal services (hotel-like services).

If you fit either exception, you’re outside the normal “rental” bucket. Then, if you materially participate, the activity is non-passive.

Quick example. You host 120 nights across 40 bookings (average 3 nights). You’re under 7 days—not a rental activity. If you materially participate (see below), your losses are non-passive.

What non-passive STR losses can offset

If your STR is not a rental activity and you materially participate, the loss is non-passive and can offset:

W-2 wages
Schedule C or K-1 non-passive income
Interest/dividends/short-term capital gains (depending on other rules)

This is why investors pair STRs with cost segregation + bonus depreciation to create large year-1 deductions that actually move the needle on total tax.

This is the “aha” most readers miss: the value is not just depreciation—it’s making that depreciation non-passive.

Material participation—human terms

A man wearing a plaid shirt is smiling while receiving keys from a woman, indicating a rental transaction, with a plant visible in the background.

You need to be active enough that the IRS considers you truly running the activity. There are seven tests; common paths:

500-Hour Test: You spend 500+ hours on the STR in the year.
Substantially All Test: You (and your spouse) do substantially all the work.
100 Hours + More Than Anyone Else: You do 100+ hours and more than any other person. Bookkeeping, messaging guests, setting rates, repairs, turnovers, supervising cleaners, vendor management, and pricing work can count. Keep a contemporaneous log.

The property-management company wrinkle (your big question)

Many owners hold the property in an LLC and pay a separate property-management company (sometimes their own Schedule C or C-corp) to handle operations. Does that break the STR play?

It depends on structure: “master lease” vs. “agent.”

Master-lease to the manager (bad for STR treatment).
If your property LLC leases the home long-term (say, a 1-year lease) to a management company, your customer is the manager, not the nightly guest. Your average period of customer use is the length of the master lease (>> 7 days). You’ve now fallen back into rental activity territory at the owner level.

Result: Your big depreciation loss is passive at the property-owner level.
If you materially participate in the management company, the self-rental rule can re-characterize net rental income as non-passive, but losses remain passive—so the cost-seg loss won’t offset W-2.

Manager acts as your agent (good for STR treatment, with caveats).
If the PM is acting as an agent (no master lease), and you—the owner—are the host granting nights to guests, your “customer use” is the guest’s stay. You can meet the < 7 days exception, and if you materially participate (not just the manager), your losses can be non-passive.

Caveat: If significant personal services are provided (daily cleaning, meals, concierge), net income may be subject to self-employment tax. If services are not significant, many practitioners treat it as not subject to SE tax, even while non-passive for §469 purposes. Facts matter; document your services.

Bottom line: Avoid master-lease arrangements if your goal is non-passive STR losses. Use an agency relationship and make sure you materially participate.

Where the law/guidance comes from (in brief)

IRS Pub. 925 explains passive activity rules, exceptions for average stays (< 7 days; < 30 days with significant services), and self-rental recharacterization (net income non-passive; losses stay passive).
IRS Chief Counsel Advice 202151005: confirms that STRs with average stays < 7 days can be non-rental activities and, with material participation, non-passive (implications also discussed for NIIT).

(There are also Tax Court decisions analyzing “significant personal services” and misclassified STRs, but Pub. 925 + CCA 202151005 are plenty to show the framework.)

Common misclassifications we still see

STRs dumped on Schedule E as passive when average stays are < 7 days and the owner clearly meets a material participation test.
Master-lease setups that unknowingly kill the STR exception at the property-owner level.
Treating heavy hotel-like services as passive (risk: SE tax can apply to net income when services are significant).

Practical checklist (use this before you buy or restructure)

Average stay math: Track nights/booking to prove < 7 days (or < 30 with significant services).
Your role: Keep a time log; if you rely on a manager, ensure you still hit a material participation test.
Contract structure: Avoid master leases; use an agency agreement with your PM.
Cost seg timing: Plan acquisition/placed-in-service dates to maximize bonus depreciation (and confirm 2025 bonus phase rules with your CPA).
SE tax exposure: If services are hotel-like, plan for possible SE tax on net income.
Documentation: Policies, pricing decisions, guest messaging, maintenance oversight—document all of it.

Have a Short-Term Rental tax question?

We handle STR questions every week for owners and real estate investors.
If you want clarity on how these 2025 rules apply to your property:

Ask a STR Tax Question

Quick FAQ

Q: If my PM company does “everything,” can I still materially participate?
A: Yes—if your hours are 100+ and more than anyone else, or you hit another test. If the PM’s hours exceed yours, you may not meet the test.

Q: Can I just lease the home to my own C-corp manager and still take non-passive losses at the property LLC?
A: Generally no. A master lease makes your customer the manager; you lose the < 7 days exception at the owner level. Also, self-rental rules can recharacterize income but not losses.

Q: Do STRs automatically go on Schedule C?
A: Not automatically. Schedule C is more likely when significant services are provided. Some non-rental, non-SE-tax STRs are still reported outside Schedule C. Facts matter; coordinate with your CPA.

The takeaway

The “loophole” isn’t magic—it’s definitions and documentation. Structure the PM relationship as agency (not master lease), keep average stays under 7 days, and materially participate. Do those three, and your depreciation-driven STR losses can become non-passive and actually offset other income.

Ready to do this the right way?

If you’re planning a 2025 STR purchase or thinking about cost seg/bonus on an existing place, let’s make sure the structure actually delivers non-passive losses (agency vs. master lease), your material participation is documented, and your depreciation plan fits your broader tax picture.

What we’ll cover in a quick strategy call:

Entity & contract check: Confirm your PM relationship is agency (not a master lease) so the STR stays out of “rental activity” status.
Participation plan: Pick the right material-participation test and set up an easy time-log so it holds up.
Cost seg & bonus timing: Coordinate placed-in-service dates, safe-harbors, and year-one impact on your W-2/other income.
SE-tax exposure: If services are hotel-like, plan for (or around) self-employment tax on net income.

Questions or ready to run numbers?
Wm. Neil Langlois, CPA, LLC • (541) 240-2933 • info@neil.tax

Important note & disclaimer

This post is general education, not tax or legal advice. Facts drive outcomes with short-term rentals (average stay, services, hours, contracts, and ownership). Before you implement anything here, get advice for your situation. Services provided by Wm. Neil Langlois, CPA, LLC (Oregon). We work with clients in multiple states.

References

IRS Publication 925, Passive Activity and At-Risk Rules (rental exceptions; self-rental rule; material participation).
Chief Counsel Advice 202151005 (STR average stay < 7 days; material participation; non-passive treatment and NIIT implications).