What is the STR loophole (7-day average stay) and who qualifies?
The STR loophole is a rule in the passive activity regulations: if the average period of customer use is 7 days or less, the property is not a "rental activity," so its losses are not automatically passive. You then only need to materially participate, not qualify as a real estate professional.
How the 7-day average is calculated
Divide the total number of days guests occupied the property in the year by the number of separate stays. If a property had 120 occupied nights across 30 bookings, the average stay is 4 days.
- Owner and family stays generally do not count as customer use.
- A few long bookings can push the average above 7 days, so watch monthly stays.
- A related rule treats rentals with an average stay of 30 days or less as non-rental activities if you provide significant personal services. That bar is higher than most hosts expect, so most investors rely on the 7-day rule.
Who qualifies
You qualify if all of these are true:
- The average guest stay for the tax year is 7 days or less.
- You or your spouse materially participate in the activity (see our guide to the hour tests).
- You keep records that prove both.
What it does not do
- It does not make losses deductible without limit. The excess business loss cap still applies.
- It does not replace real estate professional status. It is a separate route that avoids the 750 hour and more-than-half-your-time tests.
- It does not work for a rental you hold for the first partial year with almost no guest nights. Your first year numbers should be reviewed by your CPA.
FAQ
Can a property manager run everything and I still qualify?
That makes material participation difficult. If a manager does more of the work than you, most hour tests become hard to meet.
Does my spouse's time count?
Yes. For material participation, the hours of both spouses are combined, even if only one spouse owns the property.
What if my average stay goes over 7 days in a year?
Then the activity is treated as a regular rental for that year and the losses are likely passive. Seasonal bookings and monthly stays are the usual cause.
Sources
- Treas. Reg. 1.469-1T(e)(3)(ii), exceptions to the rental activity definition
- IRS Publication 925, Passive Activity and At-Risk Rules
This site shares one investor's experience and general education. We are not tax, legal, or financial professionals and this content has not been reviewed by one. Tax rules change and depend on your facts. Talk to a qualified professional before acting on anything here.