Cost Segregation Plus the STR Loophole

Classification B, legitimate, commonly abused. Real tax law with a real benefit. Promoters break it.

Sold as: "the short-term rental loophole", "no REPS needed", "offset your W-2 with real estate", "buy an Airbnb and write off your income"

The seven-day rule gets you out of the automatic passive box. It does not get you into the nonpassive box. Two tax attorneys with an LL.M. between them lost this case in December 2025 on the time log alone.

The pitch

Buy a short-term rental, run a cost segregation study, and the first-year depreciation offsets your W-2 or S corp income. No real estate professional status needed, because a rental with average stays of seven days or less is not a rental activity.

What it costs you if it is wrong

The depreciation is usually not disallowed, it is suspended: without material participation the loss is passive under Sec. 469 and waits for passive income or a qualifying disposition under Sec. 469(g). On sale, Sec. 1245 recaptures the accelerated portion. In Mirch the property genuinely qualified as a short-term rental and the taxpayers still lost, on the time log alone.

Red flags

The time log was reconstructed after year end
Claimed hours do not square with the cleaner and manager invoices
On-call time and reviewing statements are counted as participation
You were told the seven-day rule alone makes the loss nonpassive
REPS is claimed but the Reg. 1.469-9(g) election is not on the return

Questions to ask the person selling this

1What exactly does the seven-day rule do, and does it make my loss nonpassive on its own?
2Which material participation test will I meet, and how many hours does it take?
3How am I supposed to log hours during the year rather than reconstruct them in April?
4Do the hours you are projecting conflict with what I pay a cleaner or a property manager?
5If real estate professional status is claimed, is the Reg. 1.469-9(g) election going on the return?

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