Are there any loopholes still left in the tax code? Maybe.

One potential “loophole” revolves around short term rental losses.

As a real estate investor, you know if you have a loss, there are limitations kicked in by the IRS code that determine how much of those losses you can deduct. Those limitations involve whether you have an adequate basis to take a loss, whether you have an at-risk basis, and whether the loss is passive or active. Usually, (especially for high-income earners), you don’t make it to the finish line on the tax return with a deductible loss from a rental because the limitations kicked in (and limited the loss). However, there are instances when a short-term rental loss can bypass some of the loss limitations and be deductible. However, it doesn’t apply to all short-term rental losses, so please be careful when using this in your situation.

One of the rules is that if you rent a property with an average stay of seven days or less, you classify it as a short-term rental. However, according to the IRS, even though you have a short-term rental, you don’t have a rental activity. There’s a distinction between the two. If you don’t have a rental activity, you’re not dealing with the limitations on rental losses. There are quite a few caveats to go over with your CPA on whether this applies to your situation. For instance, you still have to materially participate among other requirements.

Please check back for further installments on the short-term rental loophole.