A short-term rental can let you deduct losses against W-2 income without real estate professional status — but only if the average stay is seven days or less and you materially participate. In the City of Los Angeles, the Home-Sharing Ordinance adds another layer. Stays of 30 days or less are generally allowed only in your primary residence, and you need a city registration number. Other cities in LA County have their own rules, and some ban short-term rentals outright. The tax strategy and the legal compliance are separate questions, and both have to work.

The Passive Activity Rules

Under §469, the IRS considers most rental activities to be passive. You cannot usually use losses from these properties to offset your W-2 wages. Instead, the losses are suspended and carried forward. They can offset passive income in later years, and whatever is left is released when you sell your entire interest in the activity in a fully taxable sale to an unrelated buyer. This rule stops you from using depreciation to lower your current tax bill.

The Short-Term Rental Exception

Properties with an average guest stay of 7 days or fewer are not rentals. The tax code classifies them as business activities under §469. You must materially participate in the business to deduct losses against ordinary income. The 500-hour test is the most common way to get there, but it is not the only one — you can also qualify if your participation is substantially all the participation in the activity, if you participate more than 100 hours and no one else participates more, or under the regular, continuous, and substantial basis test.

Why REPS Is Not Required

REPS under §469(c)(7) has 2 strict requirements. You need over 50% of your time and 750 hours in real estate. Most W-2 employees cannot meet these difficult targets. You do not need REPS for short-term rentals, only material participation.

How to Document Your Hours

The IRS looks closely at these claims during an audit. You must keep accurate, contemporaneous time logs for every activity. Include the date, the hours spent, and a clear description of the work. Also, save your booking records, maintenance receipts, and guest communications. For a sample log format and what examiners look for, see How to Keep a REPS Time Log That Holds Up in an IRS Audit.

Don't try to rebuild your logs after an audit starts. Courts give little weight to records put together after the fact, especially round-number estimates.

The 7-Day Test

Divide the total guest-nights by the number of bookings to find your average. If the result is 7 days or fewer, the activity isn't a "rental activity" under the passive rules. That opens the door, but the losses are only nonpassive if you also materially participate. If the average is 8 to 30 days, the same result applies only if you provide significant personal services, like daily cleaning or concierge-type work, that go beyond what a hotel-style rental normally includes.

Own a short-term rental? We can check your average stay, your material participation, and the local rules. Book a call.