TAX STRATEGY The Short-Term Rental Tax Strategy Often called the "STR Loophole" An IRS-recognized strategy that lets high-income earners use short-term rental losses to offset W-2 and other active income — without needing Real Estate Professional status. How It Works Under IRS §469, rental real estate is normally classified as a passive activity — losses can only offset other passive income. There is an exception: if the average rental period of a property is 7 days or less, the activity is NOT treated as a rental for passive activity purposes. Combined with material participation (one of seven IRS tests; most commonly 100+ hours AND more than any other individual, or 500+ hours alone), losses become non-passive and CAN offset W-2 income, business income, and capital gains. Why It's Powerful in 2026 Even with bonus depreciation phasing down (60% in 2024, 40% in 2025, 20% in 2026), cost segregation studies on coastal STR properties routinely generate 15–30% of the building basis in first-year deductions. High-income W-2 earners — physicians, attorneys, executives, business owners — can shelter $50,000 to $300,000+ of active income in year one.
Requirements
Why This Report Matters for the Strategy • ELIGIBLE markets (No Min / 1 Week / 3 Days): Daytona Beach Shores, Palm Coast, Port Orange, designated zones in Daytona Beach and New Smyrna Beach • WATCH-LIST (right at the line): Flagler Beach — 7-day citywide minimum requires careful averaging to stay eligible • NOT eligible (30-day minimums push average over 7 days): Wilbur by the Sea, unincorporated Volusia County, most of Ponce Inlet •Average rental period must be 7 days or less, calculated annually (total rental days ÷ total reservations) •Material participation in the tax year — document hours with a contemporaneous log •Cost segregation study (typically $3,000–$6,000) to break out 5/7/15-year components •Maintain audit-defense documentation: guest stay logs, hour logs, contractor invoices
Important Caveats: This is a general overview, not tax advice — consult your CPA before underwriting. Bonus depreciation continues to phase down (0% in 2027 unless reinstated by Congress). Material participation must be re- tested annually. One year with an average stay above 7 days closes the loophole for that year.
386.214.6714 • www.CoastalVentures.us • Ashley@CoastalVentures.us
Powered by FlippingBook