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Published July 15, 2026
Average guest stays of 7 days or less plus material participation can turn STR losses non-passive, and 2026 bonus depreciation is back at 100 percent.
If your South Bay short-term rental averages guest stays of 7 days or less, it is not treated as a rental activity under federal tax law at all, it is treated more like a hotel or service business. Combine that with materially participating in running it, and your losses, including a large first-year write-off from cost segregation and 100 percent bonus depreciation, can offset your W-2 or other active income without needing real estate professional status. This comes from Treasury Regulation 1.469-1T(e)(3)(ii) and Internal Revenue Code section 469.
Under the normal passive activity loss rules in section 469, rental real estate losses can only offset passive income unless you qualify as a real estate professional, which requires more than 750 hours a year in real property trades and more time in real estate than in any other job. That bar is out of reach for most owners who have a full-time career and just happen to own a beach rental in Hermosa, Manhattan Beach, or El Segundo.
Treasury Regulation section 1.469-1T(e)(3)(ii) says an activity involving the use of tangible property is not a rental activity for a given year if the average period of customer use is 7 days or less. Short-term platforms like Airbnb and VRBO push the typical South Bay beach rental well under that line, especially in summer, so the property is reclassified out of the automatic rental bucket entirely. That reclassification is the whole loophole. It removes the rule that would otherwise treat the activity as passive by default regardless of your participation.
Clearing the 7-day test only gets you out of the automatic rental label. The activity is still passive unless you materially participate in it, under the tests in Treasury Regulation 1.469-5T. The three most commonly used are: you put in more than 500 hours during the year, you put in more than 100 hours and no one else puts in more time than you do, or your participation makes up substantially all of the participation by anyone in the activity. For an owner who is hands-on with guest turnover, coordinating cleaners, and managing bookings, 100 hours is realistic. Once you clear a material participation test and the average-stay test, losses from the property become non-passive and can offset any other income you have, wages included.
This strategy pairs with a cost segregation study, which breaks a property's cost basis into shorter-lived components, appliances, flooring, certain site improvements, that depreciate over 5, 7, or 15 years instead of the standard 27.5 or 39. Under the One Big Beautiful Bill Act, signed in 2025, bonus depreciation under section 168(k) was permanently restored to 100 percent for qualifying property acquired and placed in service after January 19, 2025. The IRS issued interim guidance on this in Notice 2026-11. That means the entire cost of those shorter-lived components can potentially be deducted in the first year the property is placed in service, which is what generates the large paper loss that then flows through as non-passive against your other income if you have cleared both the 7-day test and material participation.
This is one of the more aggressive, well-documented strategies in the tax code, which also means it draws IRS attention. The average-stay calculation has to be done correctly across the whole year, personal use days can disqualify the property under separate vacation-home rules in section 280A, and material participation hours need to be logged contemporaneously, not reconstructed after the fact. Get this wrong and you are looking at disallowed losses plus penalties, not just a small technical adjustment.
If you are running or considering a short-term rental in the South Bay, this can be a legitimate way to use real losses against real income, but only with real records: a stay-length log, a participation-hours log, and, if you want the bonus depreciation benefit, an actual cost segregation study rather than a rough estimate.
If you would rather have someone else track the stay lengths, hours, and paperwork that make this defensible, that is the kind of operational detail we handle for owners.
This is general information, not legal or tax advice. Confirm with a licensed tax professional before you act.
Last verified: July 2026.
Topics: taxes, short-term rental, bonus depreciation, material participation, south bay, cost segregation
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Schofield Properties is a family run property management company at 323 Richmond St, El Segundo, CA 90245. We have managed the South Bay since 1972 and personally oversee about 186 doors today. Book a call to talk about your property.
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