How Short-Term Rentals Can Offset Your W-2 Income
If you’ve been anywhere near the real estate market, you’ve probably heard the term “STR.” But what does it mean, and why is everyone talking about it?
STR stands for Short-Term Rental—typically a house, cabin, or other dwelling rented out for an average stay of seven days or less. If you meet certain IRS criteria, your property can qualify as a short-term rental for tax purposes. These criteria generally relate to how the property is used, the average rental period, and your level of participation in managing the property.
The Tax Advantage
- Accelerated Depreciation: Investment properties allow for depreciation deductions, but short-term rentals can take this a step further through a cost segregation study.
- Normally, residential rental properties depreciate over 27.5 years. A cost segregation study reclassifies certain components—such as electrical systems, plumbing fixtures, and landscaping—into shorter depreciation periods.
- This reclassification enables accelerated depreciation, meaning you can claim larger deductions earlier in ownership. These deductions can reduce your taxable income by “front-loading” expenses.
Why Does This Matter?
Passive losses generally only offset passive income. For high earners (over $150,000 a year), long-term rentals often provide limited tax benefits. Short-term rentals, however, can qualify as non-passive under certain conditions, allowing deductions to offset W-2 income.
Bottom Line
Short-term rentals can be a powerful strategy to reduce your tax liability and keep more of your hard-earned income.
Lakes Area CPAs Ltd
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