The STR tax loophole and how your interior designer can help you make the most of it

How the STR tax loophole works

Ordinary rental losses generally cannot reduce wages or other nonpassive income. The STR tax loophole may let a short-term rental owner use a tax loss against that income without meeting real estate professional requirements—if they meet specific IRS rules. IRS Publication 925.

Where the deductions come from

Long-term depreciation of the building

The building portion of a vacation rental is depreciated over many years. Under the general depreciation system, residential rental property uses a 27.5-year period and nonresidential real property uses a 39-year period; a tax professional should determine the classification for the actual property. A cost-segregation study may identify separately classified components with shorter depreciation schedules, moving some deductions into earlier years. It does not make the entire house eligible for bonus depreciation. IRS Publication 946 and IRS Publication 5653.

Five-year depreciation of furnishings

IRS publications list these five-year furnishings and removable-décor examples:

Qualifying furnishings acquired and placed in service after January 19, 2025, may qualify for 100% bonus depreciation, allowing a full first-year deduction if the other requirements are met. IRS Publication 946.

Requirements for using the loss against other income

Average guest stay of seven days or less

To use this strategy, guest stays generally need to average seven days or less. Meeting that rule can make an STR loss eligible to offset wages or other income without the owner qualifying as a real estate professional, provided the owner also meets a material-participation test. IRS Publication 925.

Material participation by the owner

The owner must meet one of the IRS's seven material-participation tests that applies to the activity:

1. Work more than 500 hours in the activity during the tax year.
2. Do substantially all the work performed in the activity by everyone, including people who do not own it.
3. Work more than 100 hours in the activity and at least as much as any other individual.
4. Work more than 100 hours in this activity and more than 500 hours in total across all qualifying significant participation activities.
5. Have materially participated in the activity for any five of the preceding ten tax years, under a test other than this one.
6. For a qualifying personal service activity, have materially participated in any three preceding tax years. This test depends on the type of activity and is not a general shortcut for STR owners.
7. Participate regularly, continuously, and substantially, based on all the facts and circumstances. This test cannot be met with 100 hours or less, and the IRS limits when management work counts.

The IRS explains the full definitions and exceptions for these tests in Publication 925. Owners can support their participation with a calendar, appointment book, or narrative summary of their work; a daily time log is not always required. Merely reviewing finances or monitoring the investment generally does not count as participation.

Managing risks to tax benefits with your interior designer

The stay-length and participation rules address whether an STR loss may offset other income. The deductions themselves also depend on practical details: when the property is ready and available to rent, and whether furnishing costs are itemized and supported by records.

Your interior designer can help you manage both during design, procurement, and installation.

A late launch can push depreciation into a later year

Depreciation generally begins when the property or asset is ready and available for rental use. If it is not ready by the end of the owner’s tax year, its first depreciation deduction may fall in a later year. IRS Publication 527.

Get the property rent-ready faster. An experienced STR design team brings a refined process, established teams, and deep project experience to move a furnishing project from design through procurement and installation much faster than a first-time owner working alone. That speed can help investors avoid rental income lost to preventable launch delays and get the property ready and available to rent within the tax year, when timing can affect depreciation deductions. At 1584 Design, this full-service work spans design planning through procurement and installation.

Investors can miss potential deductions when furnishing costs aren’t itemized

When furnishing purchases aren’t itemized, costs that may qualify for faster depreciation can be missed. Itemized purchase records make eligible furnishing costs easier to substantiate if the IRS examines the return. IRS Publication 583.

Itemize furnishings. Investors can itemize furnishings (or work with a design team that itemizes them for you), keeping each purchase and its cost visible. This helps investors identify furnishings that may qualify for faster depreciation and support eligible deductions if questioned.

For example, 1584 Design gives every vacation rental client an itemized furnishing report they can hand to their accountant to help maximize eligible deductions without having to reconstruct purchase records.