Gabriel Virdaru, CPA, wrote a full case study for The Host Report on how the short-term rental strategy saves thousands in taxes while building long-term wealth. You can read the full article here.
Here’s a quick summary:
A W-2 employee earning $500,000 annually, with a spouse working part-time, wanted to reduce taxes and build wealth through real estate. They didn’t own any rentals yet but aimed to eventually leave the W-2 grind.
The challenge: how to reduce taxes so they keep more of their high income, allowing them to reinvest into growing their portfolio and accelerate their timeline to financial freedom.
Short Term Rentals
Under Reg. Sec. 1.469-1T(e)(3)(ii), a rental with an average stay of seven days or less, where the owner materially participates, is not considered passive. This allows rental losses to offset W-2 income without qualifying as a real estate professional.
Material Participation: Clearing the Hurdle
The easiest material participation test for the couple was the 100-hour test. Hours came from setting up the property (furnishing, decorating, stocking supplies, and creating the listing) plus guest communication, cleanings, repairs, and inspections. Time spent learning or traveling typically doesn’t count, but spouses can combine hours, making the 100-hour threshold very achievable. By taking a few hands-on weekend trips to prep the property, they easily satisfied the test and unlocked the tax benefits.
How It Pays Off
With 100% bonus depreciation reinstated under the One Big Beautiful Bill, the tax impact was substantial. A cost segregation study typically reclassifies 20%–30% of a property’s basis into bonus-eligible assets; this case yielded 25%.
- Purchase price: $750,000
- Land (non-depreciable, 20%): $150,000
- Depreciable building basis: $600,000
- Reclassified as bonus-eligible (25%): $150,000
- Marginal tax bracket (married, joint filing): 32%
The $150,000 deduction generated roughly $48,000 in federal tax savings in year one. Additional deductible expenses (mortgage interest, property taxes, insurance, utilities, and supplies) also increased the overall reported loss and tax benefit.
By using the STR strategy, this couple turned a single property into a $48,000+ tax savings vehicle while building equity and cash flow, accelerating their path to financial freedom.
