Card A: The "7-Day" Loophole (Short-Term Rentals)

Focus: Active loss treatment without "Real Estate Professional" status.

1. Short-Term Rentals (7 Days or Less)

A rental is classified as short-term if the average period of customer use is 7 days or less. These activities are generally reported on Schedule C if material participation is met, or Schedule E if not.

Loss Deductibility Benefits:

• Exemption from "Rental" Definition: Under §469, an activity with an average stay of 7 days or less is not considered a "rental activity."

• Active Loss Treatment: Because it is not a "rental activity," owners do not need to qualify as a "Real Estate Professional" to deduct losses against other active income (like W-2 wages). Instead, they only need to meet one of seven material participation tests, such as participating for more than 500 hours or being the primary participant.



• Loss Limitations: If the owner does not materially participate, the loss is still considered passive and can only offset other passive income. Additionally, these properties cannot use the special $25,000 loss allowance available to some long-term rental owners.
  

Card B: The Hospitality Model (Substantial Services)

Focus: Operating as a trade or business; understanding Self-Employment tax implications.

2. Rentals with Substantial Services (30 Days or Less)

This category includes properties where the average stay is 30 days or less and significant personal services are provided to the occupants. Substantial services include daily maid service, prepared meals (like a bed and breakfast), or delivery of sundries that are not typical for long-term rentals.

Loss Deductibility Benefits:

• Business Treatment: These are treated as trades or businesses rather than real estate rentals.



• Full Loss Deduction: If the owner materially participates in the operations, losses are fully deductible as active business losses without the limitations that apply to passive activities.

• Self-Employment Tax Note: While loss treatment is favorable, be aware that net income from these activities is subject to self-employment tax because they are considered hospitality businesses.
  

Card C: The Traditional Portfolio (Long-Term Rentals)

Focus:  Passive income management, the $25,000 loss allowance, and Real Estate Professional qualification.

3. Long-Term Rentals (30 Days or More)

Residential rental property is generally defined by the tenant's "use" as a dwelling for terms of 30 days or more. These are typically reported on Schedule E.

Loss Deductibility Benefits:

• The $25,000 Special Allowance: For individuals who actively participate (making management decisions like approving tenants), the IRS allows a deduction of up to $25,000 in net passive losses to offset non-passive income. This benefit phases out for taxpayers with Adjusted Gross Income (AGI) between $100,000 and $150,000.

• Real Estate Professional Status: If a taxpayer qualifies as a Real Estate Professional (requiring 750+ hours in real property trades and more than half of their total work hours), their long-term rentals are treated as active trades or businesses. This allows for the unlimited deduction of rental losses against any other income.

• Passive Loss Carryovers: Losses that cannot be deducted currently are suspended and carried forward indefinitely. These losses are "freed up" and become fully deductible in the year the property is sold to an unrelated party in a fully taxable transaction.



• Self-Employment Tax Exemption: Unlike the other two types, long-term rental income is exempt from self-employment tax, even for Real Estate Professionals.