Why Every High Earner Should Own a Short-Term Rental and Materially Participate

If you’re a high-income earner looking to reduce your tax bill and build long-term wealth, owning a short-term rental (STR) might be the most strategic move you can make. Especially when paired with the right tax strategy, STRs can offer something most investment properties can’t — the ability to deduct passive losses against active income without becoming a full-time landlord.

Let’s break down why high earners should seriously consider buying an STR and materially participating under IRS rules.

The STR Tax Loophole That High Earners Love

Most rental income is considered passive by the IRS, which means losses from those rentals generally can’t offset your non-passive income (like W-2 wages or business income) unless you qualify as a real estate professional.

But there’s an exception.

Short-term rentals, defined by the IRS as properties where the average guest stay is seven days or fewer, are not automatically treated as passive. If you materially participate, the income and losses from the STR become non-passive, opening the door to major tax savings.

This means you may be able to use paper losses from depreciation and cost segregation to offset W-2 or business income, even if real estate isn’t your full-time job.

What Is Material Participation for STRs?

To treat your STR as non-passive, you must meet one of the IRS’s material participation tests. Common ways to qualify include:

• Working at least 100 hours during the year and more than anyone else

• Participating at least 500 hours in managing or operating the property

• Being the only one who substantially handles operations (not using a full-service property manager)

Activities that count include guest communication, cleaning, maintenance, listing updates, and price management.

Why STRs Are Ideal for High Earners

If you’re earning multiple six figures, STRs offer unique benefits:

• Ability to deduct STR losses against active income

• High depreciation deductions due to furniture-heavy buildouts

• Massive first-year write-offs using cost segregation and 100% bonus depreciation

• Excellent cash flow potential due to higher nightly rates

• Tax savings without needing to be a full-time real estate professional

When done right, an STR can both generate income and serve as a strategic tax shelter.

What You Need to Make This Work

To benefit from this strategy, you need:

• A short-term rental with average guest stays under seven days

• Active involvement that meets IRS material participation standards

• Proper documentation (time logs, calendar tracking, and records)

• A high-quality CPA or tax advisor who understands STR tax rules

If done carelessly, the IRS could reclassify your rental as passive. But with the right structure and support, this is one of the most powerful tax strategies available to high earners today.

Final Thoughts

Short-term rentals offer the rare opportunity to reduce W-2 and business income using real estate losses, without needing to quit your job or become a full-time investor. When structured properly, they combine strong returns, lifestyle flexibility, and real tax savings.

Want to Explore STR Ownership as a Tax Strategy?

Book a free strategy call and we’ll walk you through how to find, structure, and benefit from your first or next short-term rental.

Visit: horizonwealthtax.com/free-consultation