STR Tax Loophole vs. Real Estate Professional Status (REPS): Which One Is Right For You?

Short-term rentals are surrounded by different tax strategies that can help professionals and owners save a ton through deductions. The STR Tax Loophole and Real Estate Professional Status (REPS) are among the two most popular within the industry.

With the proposal of the One, Big, Beautiful Bill posing to bring back 100% bonus depreciation, many owners and professionals are looking to combine it with either the Tax Loophole or REPS strategies.

While both can slash your tax bill, they work differently and suit different types of investors. Let’s break down how each one works, who qualifies, and which one might be the best option for your purposes.

What Is the STR Tax Loophole?

The STR tax loophole is a provision that lets you treat income coming from short-term rentals as non-passive even if you don’t work full-time in real estate. Normally, rental property losses are considered passive and can only offset other passive income, not your W-2 or business earnings.

However, if you meet certain criteria set by the IRS, your STR losses will become non-passive. This means expenses like depreciation, repairs, and mortgage interest can be deducted directly against your salary or business income, not just other rental profits.

The result? Substantial tax savings for high-income earners who self-manage their rentals, without needing to qualify as a full-time real estate professional. However, strict IRS rules apply, so careful compliance and documentation are essential to fully benefit from this loophole.

How To Qualify For the STR Tax Loophole

To qualify for the STR tax loophole, your average guest stay must be seven days or less, or up to 30 days if you provide substantial services, like hotel-style amenities.

You must also materially participate in the rental activity, which means meeting one of the seven IRS material participation tests. The IRS material participation tests include the following:

• You spend more than 500 hours on the activity during the year.
• Your participation constitutes substantially all the participation in the activity by all individuals (including non-owners).
• You participate more than 100 hours during the year, and no one else participates more than you.
• The activity is a “significant participation activity,” and your total participation in all such activities exceeds 500 hours.
• You materially participated in the activity for any five of the past ten years.
• The activity is a personal service activity, and you materially participated in any three prior years.
• Based on all the facts and circumstances, you participate on a regular, continuous, and substantial basis during the year.

If you want to learn more about the specifics of the IRS material participation tests and how to qualify for them, check out our complete breakdown.

What Is Real Estate Professional Status (REPS)?

Real Estate Professional Status (REPS) is an IRS designation that allows individuals who work primarily in real estate to treat rental losses as non-passive. Once treated as non-passive, this enables real estate professionals to offset a taxpayer’s other income, including W2, business, and investment income, without limit.

How To Qualify For Real Estate Professional Status (REPS)

To qualify as a Real Estate Professional Status for tax deduction purposes, the IRS requires you to meet three key criteria:

1. You must spend more than half of your total working hours during the year in real property trades or businesses in which you materially participate.
2. You must perform over 750 hours of service in these real property trades or businesses in the tax year.
3. You must materially participate in your rental activities, which generally means being actively involved in their day-to-day operations.

Material participation is determined by meeting one of seven IRS tests, such as spending more than 500 hours on an activity, participating more than anyone else, or meeting specific historical participation thresholds.

Importantly, all hours counted must be personal service hours that directly impact the operations of your real estate business. Investor-type activities, education, research, or passive oversight do not count toward these requirements. Strict and credible documentation, like detailed time logs and supporting evidence, is essential, as the IRS closely scrutinizes REPS claims, and audits are common.

Choosing Between The STR Tax Loophole and Real Estate Professional Status (REPS)

When deciding between the STR tax loophole and Real Estate Professional Status (REPS), you mainly have to consider your career and time commitments. The STR tax loophole is ideal if you have a full-time job or business outside real estate, want to self-manage your short-term rental, and can meet the 100+ hour (and more than anyone else) or 500+ hour material participation test. This lets you offset high W-2 or 1099 income with property losses without needing to become a full-time real estate professional.

On the other hand, REPS is best suited if real estate is your primary occupation and you can devote at least 750 hours per year, plus more than half your working hours, to real estate activities. REPS allows you to maximize deductions across a larger portfolio, including long-term rentals.

For most part-time investors, prioritizing the STR loophole with the lower hourly requirements is simpler. REPS is better suited for those with a larger stake within the real estate industry and who devote most of their hours to it.

Technically, you can qualify and use both. Some investors with both STRs and long-term rentals can strategically use both approaches for different properties, significantly increasing their tax savings even more. However, hours spent managing STRs do not count toward REPS qualification for long-term rentals, so each strategy must be managed separately and in compliance with IRS rules. It’s definitely more challenging to manage and requires a higher level of dedication to pull off successfully.

Wrapping Things Up

Both the STR tax loophole and Real Estate Professional Status (REPS) offer powerful ways to reduce your tax bill, but the right fit depends on your goals and how much time you spend in real estate.

In general, most hosts would be taking the STR Tax Loophole route. By understanding the rules and carefully tracking your hours, you can unlock significant tax savings and boost your investment returns.

Disclaimer: This article is for educational purposes only and does not constitute professional tax, legal, or financial advice. Tax laws are complex and frequently changing. The IRS may interpret regulations differently than presented. Tax policies are subject to change, implementation details may vary, and retroactive application is not guaranteed. Always consult with a qualified tax professional regarding your specific situation before making any business or investment decisions. We assume no liability for actions taken based on this content.