Can short-term rental active losses offset W-2 income? Airbnb property depreciation question

The short answer is yes, but with some important details you need to understand. Short-term rentals that average less than 7 days per rental can qualify as a "non-rental" business activity rather than traditional passive rental income. Based on what you've described (4-night average stays and 600+ hours of material participation), your Airbnb activities would likely qualify as an active trade or business under IRS rules. When a business activity is considered active and you materially participate (which you clearly do with 600-700 hours), those losses can generally offset your other income sources including W-2 income. The cost segregation study will accelerate your depreciation and can create those paper losses you're anticipating. However, there are still some potential limitations to be aware of. The IRS could potentially apply the "hobby loss" rules if your operation shows losses for multiple years. Also, if your modified adjusted gross income exceeds $150,000, there might be limitations on rental real estate losses even with active participation.

After dealing with a similar situation with my vacation rentals, I can share my experience. I was confused about how to classify my Airbnb income and losses until I found https://taxr.ai - it actually helped me properly categorize my properties as active business income vs passive rental income. They analyzed all my rental data, property management activities, and average stay duration. Their system flagged that my properties qualified as active business income since my average stay was 3.5 days and I was spending significant time managing them myself. The documentation they provided was super helpful for backing up my position with specific IRS regulations.

Just wanted to follow up - I tried taxr.ai after seeing this thread and it was honestly really helpful for my situation. I own 3 mountain cabins that I rent out on VRBO, and I was never clear if I could offset my regular income with the losses. The system analyzed my average stay length (4.2 days) and my participation hours (around 550 hours annually), and confirmed that my properties qualify as non-rental business activities. Their explanation of the relevant tax code sections helped me understand why I can offset my W-2 income with these losses. My tax preparer was initially hesitant until I showed him the detailed analysis. He's now comfortable taking the position that my short-term rental losses can offset my other income. This is saving me thousands this year with all the renovation costs and depreciation I'm claiming!

If you're struggling to document your case with the IRS about these rental losses, I'd suggest using Claimyr to get direct answers from the IRS. I was in a similar situation last year with my vacation properties and couldn't get clear guidance on how to classify them. After weeks of calling the regular IRS number and getting nowhere, I used https://claimyr.com and got through to an IRS agent in about 20 minutes. They confirmed that my short-term rentals (averaging 5-day stays) could be treated as an active business rather than passive rental activity, allowing me to offset my regular income with the losses. There's a video showing how it works here: https://youtu.be/_kiP6q8DX5c - basically they hold your place in the IRS phone queue and call you when an agent is ready. Saved me hours of hold time and I got the official guidance I needed.

I need to eat my words and apologize to Profile 9. After struggling with this exact issue for my lakefront properties, I tried Claimyr yesterday out of desperation. Got through to an IRS representative in about 15 minutes when I'd previously wasted hours on hold. The agent walked me through the distinction between rental activities and business activities based on average stay duration. They confirmed that my properties with average stays of 5 days would generally be considered a business rather than rental activity, and directed me to the specific sections of the tax code that address this (Section 469 and the related regulations). This clarification was incredibly valuable as it affects how I'll report my substantial renovation expenses this year. While they emphasized I should work with my tax professional for my specific situation, the guidance on the general rules was exactly what I needed. Thanks for the recommendation!

Something not mentioned yet - be careful with your cost segregation study and resulting depreciation. If you later sell the properties at a gain, the depreciation will be "recaptured" at a 25% tax rate (assuming current tax laws). So while accelerated depreciation can help your cash flow now by offsetting current income, you might pay for it later when you sell. Also, make sure you keep EXTREMELY detailed records of your time spent on these properties. If you get audited, the IRS will want to see evidence of those 600+ hours. A simple log showing dates, times, and activities performed will save you major headaches.

One mistake I see a lot - make sure your properties actually qualify as short-term rentals for tax purposes. Its not just about being on Airbnb. The average stay needs to be less than 7 days, and you need to be providing substantial services (similar to hotels). Also remember that material participation for each property is determined separately unless you make a grouping election. If your spending 600 hours combined across all properties, but only 150 on one of them, that specific property might not qualify as active without proper grouping.

Great question about the 7-day average and substantial services! The IRS looks at several factors to determine if you're providing "substantial services" similar to a hotel: - Daily housekeeping or frequent cleaning (you've got this covered) - Providing linens, towels, and toiletries (check) - Concierge-type services like local recommendations, booking activities - Maintenance and repair services - Guest communication and problem resolution Based on what you mentioned (linens, toiletries, coffee, cleaning between guests), you're likely meeting the substantial services test. The key is that these services are provided for the convenience of the occupant, not just basic property maintenance. For the material participation piece that Laura mentioned - you're absolutely right about the grouping election. With 600-700 total hours across multiple properties, Ethan should definitely consider making an election to group his rental activities together. This allows him to meet the material participation test for the entire grouped activity rather than each property individually. The election needs to be made by filing a statement with your tax return, and once made, it's generally binding for future years unless there's a material change in circumstances.