Short-Term Rental Tax Calculator
See how a short-term rental can create tax deductions that offset your W-2 income. The "material participation loophole" turns paper losses into real tax savings.
Property Details
Your Income
Rental Income
Includes cleaning, supplies, utilities, insurance, property tax, repairs, platform fees
Advanced Options
Cost Segregation Study
Accelerates depreciation on building components (~$5-15K cost)
Material Participation
Avg stay < 7 days + 100+ hours participation = non-passive losses
Affects bonus depreciation rates
Year 1 Net Impact
$15,240
Cash Flow
-$8,760
Tax Savings
+$24,000
Effective ROI
9.7%
Tax Savings
Year 1 Tax Savings (Bonus Depreciation)
Ongoing Annual Tax Savings
Cash Flow Analysis
Depreciation Analysis
Cost Segregation Breakdown:
Initial Investment
Your Marginal Tax Rates
Federal Marginal Rate
33%
State Marginal Rate
9.3%
Combined Rate
42.3%
Participation Status
Active
* Estimates based on projected tax brackets. STR tax rules are complex. The "material participation loophole" requires strict documentation. Depreciation creates recapture liability upon sale. Consult a CPA and tax attorney before implementing this strategy.
The Material Participation Loophole
Normally, rental losses are "passive" and can only offset other passive income. High earners with W-2 jobs get no benefit from rental property losses because of the passive activity rules.
The exception: Short-term rentals (average guest stay under 7 days) are treated as a business, not a rental activity. If you materially participate, losses become "non-passive" and can offset your W-2 income.
To Qualify for Non-Passive Treatment:
- Average guest stay must be less than 7 days
- You must participate 100+ hours per year in the rental activity
- No one else can participate more hours than you
How the Tax Savings Work
1. Depreciation Creates Paper Losses
The IRS lets you deduct the building's value over 27.5 years, even though the property may appreciate. This "phantom expense" often exceeds your actual cash flow.
2. Cost Segregation Accelerates Deductions
A cost seg study reclassifies parts of the building (appliances, carpets, fixtures) to shorter depreciation schedules, front-loading deductions.
3. Bonus Depreciation Supercharges Year 1
Until 2027, you can take accelerated bonus depreciation on cost seg components and furnishings. In 2025, that's 40% taken immediately.
4. Losses Offset W-2 Income
With material participation, your paper loss directly reduces your taxable W-2 income at your marginal rate (often 32-37% federal + state).
Important Caveats
Depreciation Recapture
When you sell, all depreciation taken is "recaptured" and taxed at 25% (federal). This is a tax deferral, not permanent avoidance.
Documentation Required
Keep detailed logs of your hours spent managing the property. The IRS can challenge material participation without records.
Real Business, Real Work
100+ hours is meaningful. You'll be managing bookings, guests, cleanings, maintenance, and restocking. Consider if you want this responsibility.
Market Risk
Rental income projections are estimates. Vacancy, seasonality, and market changes affect actual returns.
Bonus Depreciation Phase-Out Schedule
| Tax Year | Bonus Depreciation Rate | Impact |
|---|---|---|
| 2024 | 60% | Significant year 1 deduction |
| 2025 | 40% | Moderate year 1 boost |
| 2026 | 20% | Small year 1 advantage |
| 2027+ | 0% | Standard depreciation only |
Bonus depreciation applies to cost segregation components (5, 7, 15-year property) and furnishings. The building structure (27.5-year) does not qualify for bonus depreciation.
Planning Your Exit: 1031 Exchange
When you sell, you can defer depreciation recapture and capital gains by rolling into another investment property via a 1031 exchange. This lets you keep the tax deferral going indefinitely, or until you pass the property to heirs (who get a stepped-up basis).
Work With Professionals
The STR tax strategy involves complex IRS rules around material participation, passive activity limitations, and depreciation. Before purchasing a property for this strategy, consult with:
- A CPA experienced with real estate and short-term rentals
- A tax attorney for compliance and audit defense planning
- A cost segregation specialist for the study