The key difference between long-term and short-term rentals lies in the average rental period: properties rented for an average of more than seven days are generally passive (losses only offset passive income), while short-term rentals (average rental period of 7 days or less) are not classified as passive, allowing losses to offset active income if Material Participation requirements are met.
This distinction is crucial for utilizing tax benefits, especially accelerated depreciation from a Cost Segregation study. Material Participation requirements differ significantly: for Short-Term Rentals, the 100-hour rule often applies, while for Long-Term Rentals, you must meet the stringent 750-hour rule and the more than 50% professional time test to qualify as a Real Estate Professional (REP). Short-term rentals offer a unique, more accessible path to unlocking valuable tax losses against ordinary income.
Key Tax Facts for Investors
- The 7-Day Rule: This average rental period is the core differentiator that determines the initial tax classification.
- Short-Term Advantage: Short-term rentals offer a unique opportunity to unlock tax benefits (like accelerated depreciation losses) against active income with fewer hours of involvement than required for REP status.
- Strategic Planning: Understanding the Material Participation requirements is essential to maximize the utilization of depreciation deductions from either strategy.
