The Nightly Rental Advantage: Unlocking Active Status for Tax Benefits

The Nightly Rental Advantage: Unlocking Active Status for Tax Benefits

October 27, 2025

Nightly rentals, especially those with short stays and active owner involvement, can offer significant tax advantages by potentially shifting income from “passive” to “active.” This can allow owners to deduct losses against other income, rather than being limited by passive activity rules.

What qualifies as a nightly rental for “Active” Treatment?

For tax purposes, a rental is generally considered a “trade or business” (non-passive) if:

• Average Period of Customer Use is 7 Days or Less: This is the most common and straightforward way to classify your rental as non-passive. The average stay duration across all bookings for the year must be 7 days or less; Or
• Average Period of Customer Use is 30 Days or Less AND Significant Personal Services are Provided: Even if says are longer than 7 days but still 30 days or less, the activity can be considered non-passive if you provide “significant personal services.” (discussed below)

What are “Significant Personal Services?”

These services go beyond basic property management and are akin to what a hotel would provide. They demonstrate active involvement in the guess experience. Examples include:

• Daily Cleaning: Providing maid or cleaning services while the property is occupied.
• Concierge Services: Assisting guests with bookings, recommendations, or special requests.
• Meals & Entertainment: Offering breakfast, welcome baskets, or organizing guest activities.
• Transportation: Providing shuttle services or arranging transportation for guests.
• Guest Tours & Outings: Leading or arranging local excursions for guests.

What are NOT significant personal services? Routine maintenance, cleaning between stays, providing utilities (water, electricity, Wi-Fi), and trash collection are generally considered insubstantial services.

Material Participation: Proving Your “Active” Involvement

Once your rental activity is classified as a “trade or business” (due to short stays or significant services), you must then materially participate in the activity to treat it as non-passive for tax purposes. One of the most common ways to meet the material participation test for nightly rentals is:

• You participate in the activity for more than 100 hours during the taxable year, AND your participation is not less than the participation of any other individual (including those who are not owners of interest in the activity) for that year.

In simpler terms: You must dedicate over 100 hours to the rental activity, and you must put in more hours than any single person, including hired cleaners, property managers, or other individuals involved.

Examples of Activities that Count Toward Hours:

• Managing bookings and guest communication
• Supervising repairs and maintenance
• Advertising and marketing the property
• Handling guest check-ins and check-outs
• Addressing guest inquiries and issues
• Purchasing supplies and managing inventory

Key Takeaways for Nightly Rental Owners:

• Track Everything: Maintain meticulous records of guest stays, service provided, and ALL hours you dedicate to the rental activity. This is crucial for proving material participation.
• Understand the 7-Day Rule: If you average stay is 7 days or less, it simplifies the “trade or business” classification.
• Be the Most Involved: To meet the “more than 100 hours and more than anyone else” test, ensure your personal time commitment to the rental exceeds that of any single individual you hire or who assists with the property.
• Consult a Tax Professional: The rules surrounding passive activity losses and material participation can be complex. Always consult with a qualified tax advisor to ensure compliance and maximize your tax benefits.

By strategically managing your nightly rental and diligently tracking your involvement, you can potentially unlock significant tax advantages and treat your rental income and losses as active business income. 

For additional guidance, contact us today! Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.