The STR Tax Loophole: How Evolve Owners Are Benefitting

Recent federal legislation restored a powerful STR tax loophole, allowing short-term rental owners to take advantage of 100% bonus depreciation. For owners who qualify, that means the chance to deduct a substantial portion of property-related costs from your primary income.

This creates a sizable new opportunity to grow your rental business, but it’s also not the only tax advantage STR owners have at their disposal. Whether you’re considering investing in a short-term rental, turning a second home into one, or looking to maximize the profitability of an existing STR, there are ways to reduce your tax burden and free up more cash to reinvest.

Evolve can be an ideal partner in helping you leverage these benefits. Here’s what capitalizing on the STR tax loophole and other tax advantages entails — and how our management model can support your success.

Note: Evolve cannot provide tax advice. The information in this article is meant to help you understand general concepts that may apply to short-term rental ownership. Consult a qualified tax professional for guidance.

💡 Eager to buy? Get market recommendations, custom income projections, and access to financing and furnishing partners when we work together.

In This Article:
What is 100% bonus depreciation?
How do owners qualify for 100% bonus depreciation?
What is material participation?
How can owners benefit from material participation?
Taking bonus depreciation further with cost segregation
Strategy in action: How the numbers can play out
Key takeaways
Frequently asked questions

What is 100% bonus depreciation?

100% bonus depreciation lets STR owners deduct the entire cost of qualifying assets in the year they’re listed for rent from your primary income — instead of spreading them out over many years.

Under current legislation, the enhanced benefit will apply to assets placed in service between January 20, 2025 and December 31, 2029.

How do owners qualify for 100% bonus depreciation?

To use 100% bonus depreciation, your property must meet certain IRS requirements. The most critical are:

• Your property is operating as a short-term rental (average stays of 7 days or less)
• You demonstrate “material participation” in your property operations

What is material participation?

Material participation is what lets the IRS treat your short-term rental as an “active business” instead of just a passive investment. That’s important because it can open the door to bigger tax benefits.

To demonstrate material participation, you or your spouse must spend 100+ hours per year on the property, and more time than any other individual. There are other ways to satisfy the material participation requirement, but the “100-hour test” is most common among STR owners.

Preparing your property for guests, time spent coordinating repairs or improvements with contractors once it’s up-and-running, managing turnovers, or checking in with guests during their stays can all count.

Partnering with Evolve makes this simple. You can demonstrate active involvement in operations while we handle your booking management, pricing strategy, and guest support.

Plus, the team we put behind you includes a variety of experts, from revenue managers to customer support reps to trusted service partners. So no individual would ever contribute more than the 100 hours you do in a tax year.

This is the best of both worlds for leveraging material participation as a tax strategy — you get strategic management at scale without overshadowing your role as the owner, which you generally can’t achieve with full-service property managers.

It’s also worth noting: material participation in an STR can open up more deduction opportunities for rental activities beyond bonus depreciation, but it really depends on your circumstance. Speak with a tax professional to understand the ins and outs.

💡 Keep a log of your hours, receipts, and emails to document your material participation.

How can owners benefit from material participation?

As we’ve covered, material participation is a key requirement to qualify for bonus depreciation — but it can also unlock other valuable tax benefits unique to STRs.

Here’s why: the IRS usually considers rental properties generators of “passive” income, but demonstrating material participation in an STR creates a special exception that can move your property to an “active” classification.

As a result, you may be able to use STR-related deductions to offset W-2 or business wages, making STRs uniquely powerful in potentially reducing your taxable income more broadly whether or not you’re in your first year of operation.

This can really depend on your circumstance, though. Speak with a tax professional to understand the ins and outs.

Taking bonus depreciation further with cost segregation

While residential real estate generally depreciates on a standard 27.5-year schedule, many owners also use a cost segregation study in order to generate a deductible loss through depreciation on shorter timelines.

Through cost segregation, the physical components of your property as well as certain improvements associated with getting your short-term rental ready to use (like renovations or new appliances) can qualify for bonus depreciation in year one.

💡 Hire specialists — a tax specialist such as a CPA, and likely a firm that specializes in cost segregation studies.

Strategy in action: How the numbers can play out

Say you make $180,000 annually and purchase a $500,000 property. You consult professional tax guidance and decide to partner with Evolve — making it easy to get set up as a short-term rental while materially participating in your rental operations.

This qualifies you for 100% bonus depreciation, which you opt to maximize through a cost segregation study. Major property components like appliances, flooring, and landscaping are reclassified into shorter depreciation schedules — which makes more of your upfront costs fully deductible in year one.

As a result, you’re ultimately able to deduct 30% of the property’s total value — $150,000 — reducing your taxable income from $180,000 to just $30,000 for the year. This creates massive upfront savings you can then reinvest in further upgrades and future growth of your vacation rental business.

Key takeaways

Bonus depreciation can be a powerful tool short-term rental owners can use to boost cash flow and make a property investment work harder from day one. Pair it with a cost segregation study, and the benefits may be even greater. Layer on the potential to offset active income with your material participation demonstration, and you’ve built a dynamic STR tax strategy.

At Evolve, we can help you strike an ideal balance for leveraging these opportunities: you stay in control of your property operations while we simplify the management side, making it easier to qualify for bonus depreciation while focusing on your growth. Connect with us today if this sounds like the partnership you’re looking for.

And if you’re on the hunt for the right property, we can help there, too. We partner at any stage of your buying journey — whether you’re still defining your business goals or ready to chat with an agent.

Frequently asked questions