For many high-earning professionals, taxes are the single largest expense. That’s why a growing number of W-2 earners are turning to an unexpected source for tax relief: short-term rental (STR) properties like those listed on VRBO and Airbnb.

And here’s the twist — unlike traditional rental properties, these short-term rentals may allow owners to utilize real estate losses against W-2 income, even without qualifying as real estate professionals. The secret lies in how the IRS categorizes the activity.

A Brief Refresher: Passive Activity Loss Rules

Under the IRS’s passive activity loss (PAL) rules, losses from rental real estate typically can’t offset W-2 wages or other “active” income unless the taxpayer qualifies as a real estate professional under IRC §469(c)(7). For most high-income earners, this classification is out of reach due to time requirements.

But STRs — including VRBO and Airbnb listings — are not always considered “rentals” under IRS rules.

The IRS Loophole: Short-Term Rental as a Non-Rental Activity

According to Treas. Reg. §1.469-1T(e)(3)(ii)(A), a property is not treated as a “rental activity” if the average rental period is seven days or fewer. This rule creates a significant planning opportunity.

If the STR is rented out to multiple guests, each staying on average less than seven days, the IRS considers this more akin to an “active business” than passive rental income — opening the door for loss deductions against ordinary income.

This means:

1. Depreciation and operating losses from your STR can potentially offset your W-2 income.
2. You do not need to qualify as a full-time real estate professional.

Material Participation Still Required

Of course, there’s a catch. You must materially participate in the business of managing your short-term rental. This includes:

• Handling bookings and guest communication
• Cleaning or overseeing property turnover
• Maintaining the property, and
• Participating in significant management decisions

The IRS recognizes seven tests for material participation, with the most used being:

• You do all (or nearly all) of the work, or
• You spend more than 100 hours on the activity and no one else does more than you.

Good documentation is essential — logs, calendars, emails, and receipts all help.

Why High-Income W-2 Earners Should Pay Attention

In 2023 and 2024, tax strategists increasingly recommended STRs to high earners as a way to:

• Take large first-year bonus depreciation deductions on furnishings, appliances, and improvements (especially before 100% bonus depreciation phases out),
• Shelter ordinary income (including tech, finance, legal salaries), and
• Build long-term wealth through appreciating real estate assets.

As of 2024, bonus depreciation stands at 60%, down from 100% in 2022, but still a powerful tool. A $500,000 property with $125,000 of qualifying components could result in a $75,000+ paper loss — usable in the right structure.

Market Watch: What the Data Shows

Recent research from AirDNA and STR Insights shows:

• Demand for short-term rentals grew by 14% year-over-year in 2023 despite economic uncertainty.
• The most profitable STRs are typically in drive-to destinations, smaller urban markets, and niche vacation areas.
• Owner-operators who actively manage their STRs have 30–50% higher margins than those who outsource.

This aligns well with the IRS’s “material participation” test — it’s both a financial and tax-savvy move to stay hands-on.

Risks and Considerations**

Before jumping in, W-2 professionals should consider:

• Local regulations: Some cities have strict STR rules or licensing requirements.
• Time commitment: You must genuinely be involved to meet IRS standards.
• Audit risk: Improper classification can lead to audits and back taxes.

That’s why working with a CPA or advisor who understands the intersection of real estate and tax strategy is critical.

A Modern Wealth Strategy Worth Exploring

For high-earning professionals looking to diversify income and reduce tax burden, owning and managing a short-term rental is more than a trendy side hustle — it’s a strategic wealth-building vehicle.

At VestGen, we help clients evaluate whether this kind of strategy fits into their broader financial plan. From acquisition to exit strategy, our goal is to ensure your decisions don’t just save on taxes — they compound your long-term wealth.

Let’s Talk

Curious whether a short-term rental strategy could work for you?

Reach out to a VestGen advisor for a personalized conversation.