Short-Term Rental Loophole: Overhyped for W2 Physicians?
3 Downsides You Must Consider Before Jumping In
So much hype has been built around short-term rentals (STRs) as a way to lower tax bills for W2 physicians.
At the White Coat Investor Conference, the STR loophole was one of the most common topics I encountered, especially among W2 physicians.
My goal is to educate physicians on the pros and cons of the STR loophole strategy so they can make informed decisions.
While this strategy can certainly create a loss in Year 1 to offset W2 income, there are three major downsides that most physicians are not fully aware of:
Bonus Depreciation Limits
The 100-Hour Rule & Opportunity Cost
Reduced Depreciation in Year 2 & Beyond
I’m going to discuss these downsides in this article.
How the Short-Term Rental Loophole is Marketed to W2 Physicians
Options to lower high-income W2 physicians’ tax bills are certainly limited.
Here are some tax strategies I’ve written about that high-income W2 physicians can utilize:
Many physicians are familiar with Airbnb and short-term rentals. Because they already understand the concept, they are naturally drawn to the STR loophole strategy, thinking it’s an easy and effective way to reduce their W2 tax burden.
To reiterate, the key tax advantage of the STR loophole is an engineered net loss in Year 1 to offset W2 income. This involves:
A Cost Segregation Study
Applying Bonus Depreciation
Let’s briefly review each concept .
Cost Segregation Study:
A cost segregation study is performed by an engineer who classifies the building into two categories:
Building Structure & Systems – Includes walls, framing, HVAC, plumbing, electrical systems. In an apartment building, this can make up 60-80% of the total building basis.
Non-structural assets – Includes interior doors, sidewalks, flooring, cabinetry, and other assets with 5, 7, or 15-year tax lives. In an apartment building, this can make up 20-40% of the total building basis.
The second category is eligible for bonus depreciation, making a cost segregation study essential for executing the STR loophole.
Bonus Depreciation: Accelerating Tax Deductions
Normally, buildings are depreciated gradually over 27.5 years (residential) or 39 years (commercial) using straight-line depreciation.
From 2017 to 2022, 100% bonus depreciation allowed full write-offs for Non structural assets in one year.
In 2025, bonus depreciation is reduced only to 40%, significantly reducing tax benefits.
Problem #1: Bonus Depreciation Limitation
As mentioned above, in 2025, bonus depreciation is only 40%, whereas in 2022, it was 100%. Let’s illustrate how this impacts the overall tax benefit.
Example: STR Loophole Tax Benefit Comparison (2022 vs. 2025)
2022 (100% Bonus Depreciation)
Physician couple’s W2 income: $900K (assume 50% overall tax bracket)
Fourplex purchased for: $1.2M
Land allocation (not depreciable): $400K
Building allocation: $800K
Cost segregation study: 30% of $800K qualifies for bonus depreciation → $240K
100% Bonus depreciation applied: $240K × 100% = $240K paper loss created (not including regular depreciation)
Tax savings from STR loophole: $120K ($240K × 50% tax bracket)
2025 (40% Bonus Depreciation)
Physician couple’s W2 income: $900K (assume 50% overall tax bracket)
Fourplex purchased for: $1.2M
Land allocation (not depreciable): $400K
Building allocation: $800K
Cost segregation study: 30% of $800K qualifies for bonus depreciation → $240K
40% Bonus depreciation applied: 40% × $240K = $96K paper loss created (not including regular depreciation)
Tax savings from STR loophole: $48K ($96k x 50% tax bracket)
Tax savings dropped by 60% from $120K to $48K!
Two Hidden Costs That Reduce STR Loophole Benefits
#1: Many states disallow bonus depreciation, including:
California
Hawaii
Massachusetts
North Carolina
If the overall tax benefit included state tax savings of 10%, then the actual tax benefit—without state-level bonus depreciation—would drop from 50% to 40%. Applying this reduction, the tax savings would decrease from $48K to $43K.
#2: A cost segregation study on a $1M+ multi-unit property typically costs $3K–$5K from a reputable firm that defends their clients in audits. This further reduces actual tax savings.
Problem #2: 100-Hour Test & Opportunity Cost
The STR loophole, which allows net losses from the rental to offset W2 income, only works if you meet the material participation test.
The most common way that W2 physicians qualify is passing the 100-hour test.
Spend at least 100 hours actively managing the STR.
Spend more hours than any other individual working on the STR.
Log all hours spent managing the property.
Track hours spent by others (cleaners, contractors, co-hosts).
Be strategic with hiring: If a single cleaner handles all turnovers and logs more hours than you, you will not qualify. Hiring a cleaning company with multiple cleaners can help maximize your chances of passing the 100-hour test.
Opportunity Cost: Is It Worth Your Time?
If a physician earns $200/hour, 100 hours = $20K income ($10K after tax).
If a physician earns $400/hour, 100 hours = $40K income ($20K after tax).
Compare that to tax savings:
STR loophole savings in 2025 (after cost segregation costs & disallowed bonus depreciation by state): $40K
Is $40K in tax savings worth giving up 100+ hours of physician work?
For high-earning MDs, the opportunity cost may outweigh the tax benefits.
Problem #3: Year 2 & Beyond— Less Depreciation Available
The biggest downside of the STR loophole is what happens after Year 1.
Fourplex purchased for: $1.2M
Land allocation (not depreciable): $400K
Building basis after cost segregation & depreciation: $700K ($800k - $100k)
Depreciation schedules:
Short-Term Rentals (STRs) → 39-year depreciation schedule
Annual depreciation in Year 2: $18K
Long-Term Rentals (LTRs) → 27.5-year depreciation schedule
Annual depreciation in Year 2: $29K
STRs have lower depreciation after Year 1 and are more likely to generate taxable income in Year 2 and beyond. The taxable income in Year 2 and on will offset the tax deduction benefit from the Year 1.
Final Thoughts
While the idea of offsetting high W2 income in Year 1 using the STR loophole sounds exciting, it’s important to fully understand the downsides:
Bonus depreciation is only 40% in 2025, resulting in significantly lower tax savings compared to 2022.
You must spend at least 100 hours managing your rental and log all activities to qualify.
Many states disallow bonus depreciation, further reducing total tax benefits.
In Year 2 and beyond, the depreciation amount is significantly lower than for long-term rentals, likely resulting in taxable rental income that offsets the Year 1 tax benefit.
For some physicians, the STR loophole may still be worth pursuing, but for others, the time commitment and diminishing benefits may not justify the effort.
Know the risks before jumping in!
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