STR Loophole and Cost Segregation: Tax Savings for Airbnb Owners

If you own a short-term rental (STR) property—whether it's an Airbnb, VRBO, or vacation home—you may be sitting on a massive tax-saving opportunity without even knowing it. Two powerful tax strategies, cost segregation and the STR loophole, can help you dramatically reduce your income taxes and increase your cash flow. Here's how it works.

What Is Cost Segregation?

Cost segregation is a tax strategy that breaks down your rental property into various components and reclassifies them into shorter depreciation schedules (5, 7, or 15 years instead of 27.5 years). This allows you to accelerate depreciation deductions and take much larger write-offs in the early years of ownership.

Instead of deducting the value of your property slowly over nearly three decades, a cost segregation study lets you write off a significant portion much sooner—sometimes 25% to 35% of the property value in year one, especially when combined with bonus depreciation.

The STR Loophole: A Tax Game-Changer

Here's where it gets even more interesting for STR owners. Normally, large depreciation deductions from rental properties are considered passive losses and can only offset passive income—which limits the benefit for many investors.

But the STR loophole changes the game.

If you materially participate in your short-term rental business (by meeting certain IRS tests) and the average rental period is 7 days or less, the IRS treats it not as a rental activity, but as an active trade or business. That means:

You can use the losses from cost segregation to offset your W-2 income or other active income.

This is one of the few legal ways to use real estate losses to reduce taxes on your regular job income.

Requirements to Use the STR Loophole

To take advantage of this, you must meet both of the following:

1. The average stay is 7 days or less (or 30 days or less if you provide substantial services like cleaning, meals, or concierge).

2. You materially participate, which means one of the following:

   • You spend 100+ hours on the property, and no one else spends more time than you.

   • You spend 500+ hours managing the property over the year.

   • You’re the only one materially involved in the operation.

Hiring a property manager may disqualify you, so be strategic.

Real-Life Example

Let’s say you buy a $600,000 beach rental. A cost segregation study might allow you to write off $150,000–$200,000 in the first year alone. If you qualify for the STR loophole, that deduction could directly offset your W-2 income—potentially saving you $40,000–$70,000+ in federal taxes depending on your tax bracket.

Final Thoughts

If you're operating a short-term rental and you haven't looked into cost segregation and the STR loophole, you're likely leaving tens of thousands of dollars on the table. The key is timing and proper planning.

Want to see how much you could save?. Our team specializes in helping STR owners like you maximize depreciation and minimize taxes.