The unique advantage of the STR loophole is that it enables ordinary investors—without meeting the stringent Real Estate Professional status (REPS) criteria—to use real estate losses to reduce their taxable income from other sources, such as a W-2 job or business, potentially resulting in significant tax savings.
| Benefit | Long-Term Rental (LTR) | Short-Term Rental (STR) |
| Activity Type per IRS | Passive | Non-passive (if qualified) |
| Offset Ordinary Income? | Only with REPS | Yes, with material participation |
| Real Estate Professional (REPS) Requirement | Yes | No |
| Material Participation Threshold | N/A or REPS | 100–500 hours/ year |
| Accelerated/
Bonus Depreciation |
Only offsets passive income | Offsets ordinary income |
| Net Investment Income Tax (NIIT) Exemption | No | Yes, if non-passive |
For example, if you own a vacation rental property, and meet the material participation test, you could use a cost segregation study to accelerate depreciation. The resulting paper loss could offset your salary, reducing your overall tax bill—something not possible with a standard long-term rental unless you are a real estate professional.
The STR loophole stands out from other real estate tax benefits by making powerful tax reduction strategies accessible to regular investors. This flexibility and accessibility are what set it apart in the real estate tax landscape.
