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Short-Term Rental Loophole CPA in Los Angeles

LaviCPA is a Los Angeles CPA firm that checks whether your short-term rental qualifies for the "STR loophole", sets up the records that support it, and reports it on your federal and California returns. The rule is narrow. If guests stay 7 days or less on average, the property is not a "rental activity" under the passive loss rules. If you also materially participate, its losses can offset W-2 income without real estate professional status. Shawn Lavi, CPA, our principal, and Elias Lavi, CPA, co-owner and founder, review the average stay, your hours, and the local short-term rental rules before you count on the deduction.

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What the STR loophole is

Section 469 treats most rentals as passive, which usually keeps rental losses away from your wages (why rental losses usually do not offset a W-2). Treas. Reg. §1.469-1T(e)(3)(ii)(A) carves out an exception. An activity is not a rental activity if the average period of customer use is 7 days or less. Paragraph (B) extends that to 30 days or less when you provide significant personal services, and paragraph (C) covers extraordinary personal services. The average is computed under §1.469-1(e)(3)(iii).

This is not real estate professional status. REPS needs 750 hours and more than half your working time in real estate (see REPS and passive losses). The STR route skips that test. It still needs material participation. For the longer explainer, read using short-term rentals to reduce your 2026 tax bill.

Material participation: the tests that matter for STR owners

The tests are in Treas. Reg. §1.469-5T(a). The ones STR owners use most:

  • You put in more than 500 hours during the year.
  • Your participation is substantially all of the participation in the activity.
  • You put in more than 100 hours, and no other individual put in more than you. Cleaners and co-hosts count as individuals.
  • The regulation also has a significant-participation test, a 5-of-10-years test, and a facts-and-circumstances test. The facts-and-circumstances test needs more than 100 hours (§1.469-5T(a)(7)).

The 100-hour test is where most owners get caught. If your cleaner or property manager logs more hours than you, that test fails. You then need 500 hours or another test. Material participation vs. active participation explains the difference.

What we check before you rely on it

Before you claim the loss, we check:

  • The average stay for each year, from your booking records.
  • Your hours against the hours of managers, cleaners, and co-hosts.
  • Grouping, meaning whether the property is treated as its own activity.
  • Whether the property is legal as a short-term rental where it sits.
  • Whether the loss is usable after the federal excess business loss cap and on the California return.

Documentation

Treas. Reg. §1.469-5T(f)(4) lets you prove your hours by any reasonable means, such as calendars, appointment books, or narrative summaries. Records kept as you go are the strongest. Keep the booking platform exports, guest messages, and vendor invoices that back up each entry. See our article on keeping a time log that holds up in an audit.

Los Angeles rules come first

Local law decides whether you can run the property as a short-term rental at all.

  • City of Los Angeles. Home-sharing is allowed only in your primary residence, meaning you live there more than 6 months a year. There is a 120-day cap unless you qualify for Extended Home-Sharing. RSO units are not eligible. You register with the city, and stays owe the 14% transient occupancy tax.
  • West Hollywood. Only owner-resident home sharing is allowed.
  • Beverly Hills. Every residential rental needs an initial lease of at least 12 months.

That creates a tax problem. If the property is your home, §280A(c)(5) can limit your deductions, and §469(j)(10) then takes that use out of the passive loss rules.

Pairing with cost segregation and bonus depreciation

A building where more than half the units are used on a transient basis is not "residential rental property" under §168(e)(2)(A), so a short-term rental may be 39-year property. Federal bonus depreciation is 100% for property acquired and placed in service after January 19, 2025, using the binding-contract date. For 2026, the federal excess business loss cap is $256,000, or $512,000 on a joint return. California has its own excess business loss limit (R&TC §17560.5). It was $313,000, or $626,000 joint, for 2025, and the 2026 figure is not yet out. Our cost segregation page covers the study, and REPS, cost segregation, and the 2026 excess business loss cap covers the cap.

California is different

California does not allow federal bonus depreciation (R&TC §17250(a)(4)), so the California loss is smaller.

California follows the federal passive loss rules except REPS (R&TC §17551(a) and §17561(a)), and it applies federal regulations unless they conflict with California law (R&TC §17024.5(d)). No California statute or FTB instruction carves out the 7-day rule. So a short-term rental that is nonpassive federally under the 7-day rule and material participation should be nonpassive on the California return too. The FTB has not issued guidance on the 7-day rule itself, so we treat it as a supported position, not a settled one.

More: California bonus depreciation non-conformity.

Who you work with

Shawn Lavi, CPA is LaviCPA's principal. Elias Lavi, CPA is co-owner and founder. Both are licensed CPAs with the California Board of Accountancy. Elias founded the firm about 40 years ago. Our office is at 7707 Sunset Blvd, Los Angeles, CA 90046.

STR loophole FAQs

What is the short-term rental loophole?

If the average guest stay is 7 days or less, the property is not a rental activity under the passive loss rules. If you also materially participate, its losses are not passive and can offset other income, including W-2 wages. You do not need real estate professional status.

How do I calculate the average stay?

Average stay = total rental days ÷ number of separate stays, for the year (Treas. Reg. §1.469-1(e)(3)(iii)). If the result is 7 or less, the 7-day exception can apply.

Is 100 hours enough?

Only if it is more than 100 hours and no other individual, including your cleaner or co-host, put in more hours than you. If someone did, you need another test, such as more than 500 hours.

Can I use the STR loophole on a home in the City of Los Angeles?

The City of LA allows home-sharing only in your primary residence. That raises the §280A personal-use problem, which can limit the deduction. Talk to us before you count on it.

Does California allow the same deduction?

Mostly, with two differences. California follows the federal passive loss rules other than REPS, so the 7-day rule should apply on the California return too, though the FTB has not addressed it directly. California does not allow bonus depreciation, so the California loss is smaller. California also has its own excess business loss limit.

Book a New Client Introduction

Bring your booking exports for the year, your hours log if you keep one, and the property's address. We will tell you whether a full review makes sense.

The intro is free and runs 30 minutes, by Zoom, by phone, or at our office on Sunset Blvd. It covers fit, scope, and next steps. Tax answers come after that, as paid work.

Book a New Client Introduction or call 323-463-2600.

The information on this page is for educational purposes and does not constitute tax, legal, or investment advice. Tax rules change and your situation is unique. Please consult LaviCPA or another qualified CPA before acting on anything here.

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