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May 23, 2024 | read

Do Mid-Term Rentals Qualify For The STR Loophole?

Thomas Castelli

Navigating the intricacies of investing in short-term rentals (STRs) and mid-term rentals (MTRs) can be daunting.  

Particularly, understanding how mid-term rentals fit into The Short-Term Rental (STR) Loophole and the importance of accurate number rounding when determining customer use.

In this blog post, explore these complexities in greater detail. 

Do Mid-Term Rentals (MTRs) Qualify for The STR Loophole?

In the context of The Short-Term Rental (STR) Loophole, mid-term rentals (leases that last for a few months but less than a year) can be a gray area. 

According to the regulations, to qualify for the STR Loophole, a property’s average rental period must be seven days or less (or 30 days or less if you provide substantial services). Therefore, whether or not MTRs qualify for the STR loophole largely depends on how they affect the average rental period for the property.

Let’s break this down a bit further.

If your property is exclusively used for mid-term rentals, it is unlikely to qualify for the STR Loophole. This is because the average rental period of such leases is significantly longer than the seven-day limit.

However, if you mix short-term and mid-term rentals, whether or not you qualify for the STR Loophole will depend on the average rental period. Remember, it’s not about the individual rental periods, but rather the average rental period across all rentals.

In conclusion, while mid-term rentals are not inherently ineligible for the STR Loophole, their effect on the average rental period of the property could result in disqualification. 

As always, it’s essential to consult with a tax professional when making these determinations to ensure compliance with tax laws.

The Role of Rounding Numbers

In the world of short-term rentals, the average period of customer use is a crucial factor. However, when calculating this average period, the approach to rounding numbers is a critical aspect that investors must be aware of.

The average period of customer use is defined as the total days rented divided by the total number of rentals. To qualify for the short-term rental (STR) Loophole, a property’s average rental period must be seven days or less.

You might be wondering if you could just round down to meet this requirement. The answer, according to tax court cases, is a firm no. The IRS and tax courts have been explicit about not allowing rounding. They are strict in their interpretation of the seven-day limit, even carrying decimal points out to five or six places.

A significant case to note is James V. Judith M. Patterson V. Commissioner, a summary opinion from 2002. In this case, the court did not round the average stay of 5.6000000 days, even though the exact calculation was exactly 5.6. 

In another notable case, Moreno v USA, the taxpayer rented out an aircraft he owned and the tax court noted the number of customer use days was 44, the number of periods of customer use was 35, and therefore the average period of customer use was “1.25714 days”. 

The implication is clear: even a slight fraction over seven days can disqualify a property from the STR Loophole.

In summary, while rounding numbers might seem like a negligible detail, it has significant implications when determining the average period of customer use. The authorities are very precise about this calculation, and even an average stay of 7.05 days can disqualify a property from the STR Loophole. Therefore, you must maintain exact records and avoid rounding when calculating the average period of customer use.

Determining Average Period on Duplexes and Other Multifamily Properties

When it comes to duplexes or other multifamily properties, calculating the average period of customer use requires careful consideration. The calculation should factor in the percentage of rental revenue from both short-term and long-term rentals and their respective average periods of customer use. 

After multiplying these two factors for each rental type, you combine the results. This aggregate figure is considered the average period of customer use for the property as a whole.

Unfortunately, in most scenarios, the presence of long-term rentals pushes the average period of customer use well above the seven-day limit, making it difficult for the property to qualify for the STR Loophole.

Navigating these complexities can be challenging, and professional guidance is highly recommended. Contact us today to learn more about how you can use short-term rentals to reduce taxes on your non-passive income and to avoid falling foul of tax regulations and potential penalties.