Material participation is what converts a loss from passive to non-passive. Clearing the seven-day average stay test removes the automatic rental classification under Section 469. It does not by itself make the loss usable against wage income. For that, the owner has to materially participate under one of seven tests. This is where it stood in 2025, which was the year the acquisition date on your closing statement started to matter enormously.
What 2025 changed
2025 was the year the tax calculation split in two. Property acquired on or before 19 January stayed on the old phase-down at 40%. Property acquired after that date, once OBBBA passed in July, qualified for 100% bonus depreciation again. The same property, the same buyer, a different acquisition date, and a materially different first-year deduction.
Supply growth had slowed enough that well-selected markets were producing consistent results again, and the gap between markets widened as regulation diverged.
2025 was the split year. Property acquired on or before 19 January 2025 stayed on the phase-down at 40%. The One Big Beautiful Bill Act, signed in July, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after 19 January 2025.
How it works
Material participation is what converts a loss from passive to non-passive. Clearing the seven-day average stay test removes the automatic rental classification under Section 469. It does not by itself make the loss usable against wage income. For that, the owner has to materially participate under one of seven tests.
- More than 500 hours of participation in the activity during the year.
- Participation constituting substantially all of the participation by all individuals, including paid managers and cleaners.
- More than 100 hours, with no other individual participating more, which is the route most W-2 earners actually take.
- Four further tests covering significant participation activities, prior-year participation, personal service activities, and a facts and circumstances test.
What that meant in 2025 specifically
For anyone buying after 19 January 2025, the restoration of 100% bonus depreciation returned the strategy to full strength for the first time since 2022.
The risk in 2025 was assuming the restored bonus depreciation applied to a property already owned or already under contract before the cut-off. Acquisition date, not placed-in-service date alone, governs which schedule applies.
2025 rewarded buyers who confirmed with their CPA which schedule their specific acquisition fell under before modelling a deduction.
This is an explanation of how the rules worked, not tax advice. My BnB Accelerator, LLC is a real estate acquisition firm, not a CPA firm. Our independent partner firm is AE Tax Advisors.
Where it goes wrong
The failure modes are consistent across years, which is itself useful information: they are not caused by the market cycle, so a different year does not protect you from them.
- Handing everything to a full-service manager, which frequently defeats the 100-hour test because the manager participates more than the owner.
- Reconstructing a participation log in April rather than keeping one contemporaneously.
- Counting investor-type activities such as reviewing statements in a non-managerial capacity, which are specifically excluded.
What a buyer should have done in 2025
2025 rewarded buyers who confirmed with their CPA which schedule their specific acquisition fell under before modelling a deduction.
The underwriting discipline does not change with the year. Twelve individual monthly revenue figures from a comparable set you assembled, a complete expense stack including reserves, and a stress test at 75% of projection that still covers debt service.
We screen roughly a thousand deals a week and eliminate about 98% of them. That ratio has held across every year on this site, through the boom, the correction and the stabilisation, because it is a function of how listings are selected rather than of the market.
What generalises, and what does not
Reading a year in isolation is the most common analytical error in this business. 2025 had its own conditions, and someone who learned the wrong lesson from it carried that lesson into a market that no longer rewarded it.
What generalises is the mechanics above. The definitions, the tests, the sequence and the failure modes are the same in every year on this site, which is why they are worth learning properly once rather than relearning each cycle.
What does not generalise is the environment: the cost of capital, the depth of supply, the bonus depreciation percentage, and the regulatory posture of a given jurisdiction. Those change, sometimes abruptly, and a model that treats them as fixed is a model that was only ever right about one year.
The practical consequence is to build the analysis so the environment is an input rather than an assumption. A property that only works at one interest rate, one occupancy level and one tax treatment is not an investment thesis, it is a bet that nothing moves.
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Frequently asked questions
What was different about material participation on a short-term rental in 2025?
2025 was the year the tax calculation split in two. Property acquired on or before 19 January stayed on the old phase-down at 40%. Property acquired after that date, once OBBBA passed in July, qualified for 100% bonus depreciation again. The same property, the same buyer, a different acquisition date, and a materially different first-year deduction.
What was the main risk in 2025?
The risk in 2025 was assuming the restored bonus depreciation applied to a property already owned or already under contract before the cut-off. Acquisition date, not placed-in-service date alone, governs which schedule applies.
What was bonus depreciation in 2025?
2025 was the split year. Property acquired on or before 19 January 2025 stayed on the phase-down at 40%. The One Big Beautiful Bill Act, signed in July, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after 19 January 2025.